UPDATED EXPLANATORY NOTES

NIRC SECTION 1 83
August 31, 2016
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NIRC being a special law prevails over a general law like Civil Code.
Revenue law, is a law passed for the purpose of authorizing the levy and collection of taxes.
Revenue derived from taxes are exempt from execution.
Revenue refers to all funds or income derived by the government whether from tax or other
source.
Enforcement and collection of tax is executive in character.
La Suerte Cigar vs. CA, 134 SCRA 29 when an administrative agency renders an opinion
by means of circular or memo, it merely interprets a pre-existing law, and no publication is
necessary for its validity. Construction by an executive branch of government of a particular
law although not binding upon the courts must be given weight. These agencies are the one
called to implement the law.
Rulings or interpretation while entitled to great weight, are not judicially binding.
BIR RULINGS and DOJ Opinions are less general interpretation of tax laws of the
administrative level issued by the BIR and the DOJ. These two will take a character of
substantive rules and are generally binding and effective, if not otherwise contrary to law or
constitution.
It is the BIR who will seek DOJ opinion on tax laws not the taxpayer.
Ruling of first impression means rulings, opinions & interpretations without established
precedents. Only the CIR can issue this ruling. Those with precedents are called Ruling with
established precedents.

Requisites for valid regulations. (a) They must not be contrary to law; (b) They must be
published in the Official Gazette; (c) They must be useful, practical and necessary for law enforcement;
(d) They must be reasonable in their provisions; and (e) They must be in conformity with the legal
provisions.
Rational Basis Test - It is sufficient that the legislative classification is rationally related to
achieving some legitimate state interest. (British American Tobacco vs. Camacho, G.R. No. 163583, April
15, 2009)
Assessment, meaning. With special reference to internal revenue taxes, an assessment is
merely a notice to the effect that the amount stated therein is due as tax and a demand for the payment
thereof. It is not an action or proceeding for the collection of taxes. It is a step preliminary, but essential to
warrant of distraint, if still feasible, and also to establish a cause for judicial action as the phrase is used in
the Revenue Code.
Even an assessment based on estimates is prima facie valid and lawful where it does not appear
to have been arrived at arbitrarily or capriciously. (Marcos vs. CA, 273 SCRA 47, 1987)
Assessment is not an action or proceeding. It is a preliminary step.
Assessment as a general rule is a condition sine quanon for the collection of taxes but not for
filing criminal actions.
An assessment fixes and determines the tax liability of a taxpayer. As soon as it is served, an
obligation arises on the part of the taxpayer concerned to pay the amount assessed and demanded.
Hence, assessments should not be based on mere presumption no matter how reasonable or logical said
presumption may be.
In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The
presumption of correctness of assessment being a mere presumption cannot be made to rest on another
presumption x x x. (Collector vs. Benipayo, 4 SCRA 182)
A tax assessment is prima facie valid and correct and the taxpayer has the burden of proof to
impugn its validity. (Behn Meyer & Co. vs. Collector of Internal Revenue, 27 Phil. 647) The validity of a tax
assessment is a disputable presumption. (Perez vs. CTA, et al., G.R. No. L-10507, prom. May 30, 1948;
Collector vs. Bohol Land Transportation, G.R. Nos. L-13099 and L13462, prom. April 29, 1960)
All presumptions are in favor of the correctness of tax assessments. The good faith of tax
assessors and the validity of their actions are presumed. The burden of proof is upon the taxpayer to
show clearly that the assessment is erroneous, in order to relieve himself from it.

Where a taxpayer question the correctness of an assessment against him and is apparently not
acting in bad faith or merely attempting to delay payment, but is deprived of the best means of proving his
contention because his books of accounts were lost by the BIR agent who examined them, said taxpayer
must be given an opportunity to prove by secondary evidence that the assessment is incorrect. (Santos
vs. Nable, et al., 2 SCRA 21)
As the law provides that any person who is aggrieved by an assessment issued by the
Commissioner of Internal Revenue is given only 30 days to appeal therefrom to the Tax Court, the only
effect should be that after that period, the assessment can no longer be questioned by the taxpayer;
otherwise, the assessment which has become final, executory and demandable under Section 11 of
Republic Act No. 1125 would be an absurdity. (Republic vs. Antonio Albert, G.R. No. L-12996, prom. Dec.
28, 1961)
The taxpayers failure to appeal to the Court of Tax Appeals in due time made the assessment in
question final, executory and demandable. (Republic vs. Manila Port Service, G.R. No. L-18208, prom.
Nov. 27, 1964) And when the present action for collection of the tax was instituted, said taxpayer was
already barred from disputing the correctness of the assessment or invoking any defense that would
reopen the question of its tax liability on the merits. (Republic vs. Albert, 3 SCRA 717) Otherwise, the
period of thirty days for appeal to the Court of Tax Appeals would make little sense. (Republic vs. Lopez,
2 SCRA 566)
Acquittal in a criminal case does not exonerate taxpayers civil liability to pay the tax due
(Republic vs. Patanao, G.R. No. L-22317, July 21, 1967)
Best evidence obtainable, explained. It refers to the findings gathered by internal revenue
examiners and agents from the records of the register of deeds, corporations, employers, clients or
patients, tenants, lessees, vendees and the like with whom the taxpayer had previous transactions or
from whom he acquired any income.
It will be noted that under Section 5 of the said Code, the Commissioner of Internal Revenue may
obtain information on potential taxpayers from government offices or agencies.
Networth method of investigation. As stated above, the Commissioner of Internal Revenue
may make tax assessments on the best evidence obtainable. He can avail of methods in order to arrive at
a correct and reasonable assessment of taxes. One method is the networth method of investigation.
The power or authority of the Commissioner to choose the method of determining taxable income
is quite comprehensive, and the only limitation to the exercise of such power of authority is that the
method chosen or adopted must clearly reflect the income. Consequently, Tax Code (Sec. 43)
authorizes the Commissioner of Internal Revenue to employ the networth method, where a taxpayer
keeps no books or records or where such books or records do not clearly reflect his income.
(Commissioner vs. Enrique Avelino, G.R. No. L-14847, prom. Sept. 19, 1961)
It is not required in networth cases that the Government prove with absolute certainty the sources
from which petitioner derived his unreported income. It is sufficient if evidence is adduced of the likely
source or sources of such income. In this case, there is ample evidence of the probable sources from
which petitioner could have derived his undeclared income such as flourishing business in optical goods,
office equipment, and haberdashery; horse racing, and real estate transactions. (Reyes vs. Collector,
G.R. Nos. L-11534 & L-11558, prom. Nov. 25, 1968)
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CIR vs. Hantex, G.R. No. L-136075, March 31, 2005

Mere photocopies not admissible. Exert effort to get the original
Hearsay evidence is admissible. BIR not bound by the technical rules of evidence. It depends
on trustworthiness for evidence to be admissible.

A. SECRECY OF BANK DEPOSITS

Q. What guarantees on confidentiality do depositors enjoy under the law?
A. For peso deposits, Republic Act No. 1405 (Bank Deposits Secrecy Law) declares all deposits of
whatever nature with banks in the Philippines, including investments in government bonds, as of an
absolutely confidential nature and prohibits the examination or inquiry into such deposits or investments
by any person, government official, bureau or office, as well as the disclosure by any official or employee
of a bank of any information concerning said deposits.
There are only four (4) instances under the law where bank deposits or investment in government bonds
may be disclosed or looked into, namely: (1) upon written permission of the depositor; or (2) in cases of

impeachment; or (3) upon order of a competent court in cases of bribery or dereliction of duty; or (4) in
cases where the money deposited or invested is the subject matter of the litigation.
It may be noted that RA 1405 covers not only bank deposits but also investments in government bonds.
For foreign currency deposits, Republic Act No. 6426 (The Foreign Currency Deposit Act) similarly
declares that these deposits are of an absolutely confidential nature and cannot be examined, inquired or
looked into by any person, government official, bureau or office whether judicial or administrative or
legislative or any other entity whether public or private. There is only one instance for disclosure under
said law and, that is, upon the written permission of the depositor. RA 6426 also exempts foreign currency
deposits from attachment, garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever.
For investments in trust accounts or in deposit substitutes, if these are in the form of investments in
government bonds or deposits, the protection under RA 1405 and RA 6426 extends thereto accordingly. If
these are in other forms of investments, the disclosure of information related thereto is covered by
Section 55 of the General Banking Law of 2000 (Republic Act No. 8791) which prohibits, unless there is
an order of a court of competent jurisdiction, the disclosure by any director, official, employee or agent of
any bank any information relative to the funds or properties in the custody of the bank belonging to private
individuals, corporations or any other entity.
NOTE:
Under par. (F) of the NIRC, it states:
(F) Authority of the Commissioner to Inquire into Bank Deposit Accounts and Other Related Information
Held by Financial Institutions. Notwithstanding any contrary provision of Republic Act No. 1405,
Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act of the Philippines, and
other general or special laws, the Commissioner is hereby authorized to inquire into the bank deposits
and other related information held by financial institutions of:
(1) A decedent to determine his gross estate; and
(2) Any taxpayer who has filed an application for compromise of his tax liability under Sec.
204(A)(2) of this Code by reason of financial incapacity to pay his tax liability.
In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim that hi
financial position demonstrates a clear inability to pay the tax assessed, his application shall not be
considered unless and until he waives in writing his privilege under Republic Act No. 1405, Republic Act
No. 6426, otherwise known as the Foreign Currency Act of the Philippines, or under other general or
special laws, and such waiver shall constitute the authority of the Commissioner to inquire into the bank
deposits of the taxpayer.
(3) A specific taxpayer or taxpayers subject of a request for the supply of tax information
from a foreign tax authority pursuant to an international convention or agreement on
tax matters to which the Philippines is a signatory or a party of: Provided, That the
information obtained from the banks and other financial institutions may be used by
the Bureau of Internal Revenue for tax assessment, verification, audit and enforcement
purposes.1
In case of a request from a foreign tax authority for tax information held by banks and financial
institutions, the exchange of information shall be done in a secure manner to ensure
confidentiality thereof under such rules and regulations as may be promulgated by the Secretary
of finance, upon recommendation of the Commissioner.
The Commissioner shall provide the tax information obtained from banks and financial
institutions pursuant to a convention or agreement upon request of the foreign tax authority when
such requesting foreign tax authority has provided the following information to demonstrate the
foreseeable relevance of the information to the request:
(a) The identity of a person under examination or investigation;

1 As amended by RA 10021, entitled An Act to Allow the Exchange of Information by

the BIR on Tax Matters Pursuant to Internationally-Agreed Tax Standards, otherwise
known as Exchange of Information on Tax Matters Act of 2009, Amending Secs. 6(F),
71, and 270 of the NIRC of 1997, as Amended, and for Other Purposes march 5, 2010
3

(b) A statement of the information being sought including its nature and the form in which
the said foreign tax authority prefers to receive the information from the
Commissioner;
(c) The tax purpose for which the information is being sought;
(d) Grounds for believing that the information requested is held in the Philippines or is in
the possession or control of a person within the jurisdiction of the Philippines;
(e) To the extent known, the name and address of any person believed to be in
possession of the requested information;
(f) A statement that the request is in conformity with the law and administrative practices
of the said foreign tax authority, such that if the requested information was within the
jurisdiction of the said foreign tax authority then it would be able to obtain the
information under its laws or in the normal course of administrative practice and that it
is in conformity with a convention or international agreement; and
(g) A statement that the requesting foreign tax authority has exhausted all means
available in its own territory to obtain the information, except those that would give
rise to disproportionate difficulties.
The Commissioner shall forward the information as promptly as possible to the requesting foreign
tax authority. To ensure a prompt response, the Commissioner shall confirm receipt of a request
in writing to the requesting tax authority and shall notify the latter of deficiencies in the request, if
any, within sixty (60) days from receipt of the request.
If the Commissioner is unable to obtain and provide the information within ninety (90) days from
receipt of the request, due to obstacles encountered in furnishing the information or when the
bank or financial institution refuses to furnish the information, he shall immediately inform the
requesting tax authority of the same, explaining the nature of the obstacles encountered or the
reasons for refusal.
The term foreign tax authority, as used herein, shall refer to the tax authority or tax
administration of the requesting State under the tax treaty or convention to which the Philippines
is a signatory or a party of.
Q. How do banks respond to an order of a competent court?
A. For peso deposits, banks comply with orders for disclosure in court cases subject to these
requirements: (a) there must be a court order; (b) the order must be issued by a competent court
specifically directing the bank concerned to disclose the required information; and (c) the bank should
check and satisfy itself that the deposits or investment in government bonds being inquired into are either
the subject of a case of bribery or dereliction of duty of public officials, or of a case where the deposit or
investment itself is the subject matter of the litigation. If these requirements are not met, there would be
basis for the bank to request the court to excuse compliance with the court order.
In impeachment cases, it is necessary that there be an order issued by the impeachment court or by its
authorized officer. For foreign currency deposits, the law does not provide an instance for disclosure upon
a court order. As mentioned above, there is only a single instance for disclosure under RA 6426 and, that
is, upon written permission of the depositor. Thus, for foreign currency deposit accounts subject of a court
order, the bank can invoke RA 6426 to excuse compliance.
Q. What is the liability of the banks and/or its officers and employees for violating the laws against
disclosure?
A. Violations of the prohibitions against disclosures under RA 1405, RA 6426 and under the General
Banking Law of 2000 are subject to stiff criminal penalties.
Under RA 1405, the offender is subject to imprisonment of not more than five years or a fine of not more
than P20,000, or both, in the discretion of the court. Under RA 6426, the penalty is imprisonment of not
less than one year not more than five years or a fine of not less than P5,000 nor more than P25,000, or
both, in the discretion of the court. The violation of Sec. 55 of the General Banking Law of 2000, the
penalty is imprisonment of not less than two years nor more than 10 years or a fine of not less than
P50,000 nor more than P200,000, or both, in the discretion of the court; and in addition, if the offender is
a director or officer of a bank, he is subject to suspension or removal by the Monetary Board.
B. USE OF ALIAS OR NUMBER IN OPENING DEPOSIT ACCOUNTS
Q. Are banks allowed to open accounts using an alias or a number?

A. There is no specific banking law up to the present prohibiting banks from opening deposit accounts
using an alias or a number. Prior to July 7, 2000, there is also no banking regulation providing for such
prohibition. On July 7, 2000 and in seeking the adoption of anti-money laundering measures, the Bangko
Sentral ng Pilipinas (BSP) issued a regulation, Circular No. 251, providing that, unless otherwise
prescribed under existing laws, anonymous accounts or accounts under fictitious names are prohibited.
The exception referred to under Circular No. 251 was RA 6426 (The Foreign Currency Deposit Act) which
explicitly allows the keeping of numbered accounts for the recording and servicing of deposits.
For peso accounts, when banks allow the opening of deposit accounts under pseudonyms, it is assumed
that: (1) they have exercised due diligence to ascertain the identity of their clients; and (2) they are aware
of the legal provisions and requirements on the use of pseudonyms.
The above notwithstanding, it may be pointed out that in the Manual of Regulations issued by BSP, or
even before the issuance of Circular 251, there were already regulations requiring the banks to: (a) adopt
systems to establish the identity of their depositors; and (b) require to set a minimum of three (3)
specimen signatures from each of their depositors subject to regular updating. Even for numbered
accounts as authorized under RA 6426, BSP has required banks, under Circular 258, to take necessary
measures to establish and record the true identity of their clients, which identification may be based on
official or other reliable documents and records.
Q. Are there other laws governing the use of pseudonyms or aliases?
A. Art. 178 of the Revised Penal Code penalizes the: (a) publicly using of a fictitious name for the purpose
of concealing a crime, evading the execution of a judgment, or causing damage; and (b) concealment by
any person of his true name and other personal circumstances.
On the other hand, there is also Commonwealth Act No. 142, as amended by Republic Act No. 6085
(Regulating the Use of Aliases) which provides that, except only as a pseudonym for literary purposes
and athletic events, it is unlawful for any person to use an alias, unless the same is duly recorded in the
proper local civil registry. Related thereto, Articles 379 and 380 of the Civil Code provide that no person
shall use different names and surnames except the employment of pen and stage names provided it is
done in good faith and there is no injury to third persons.
What can be noted is that the above provisions allow the use of aliases under certain circumstances.
Conversely stated, the use of aliases is not absolutely disallowed. Moreover, the sanctions for any
violation of the above provisions on aliases are mainly directed to the one using the unauthorized alias.
Q. How does Circular No. 251 apply to existing numbered accounts?
A. For peso accounts, the banks should have their respective programs of compliance with the Circular.
For foreign currency deposit accounts, they are allowed to continue maintaining numbered accounts
opened in accordance with RA 6426 subject to the requirement that the banks shall take necessary
measures to establish and record the true identity of their clients.
Q. What penalties/sanctions are applicable for violating the laws/regulations?
A. Article 178 of the Revised Penal Code is directed to the person concealing his identity publicly or using
a fictitious name and the penalty would range from one day up to six months imprisonment and/or a fine
up to P500,000. For violation of Commonwealth Act 142, which is likewise directed to the person using an
unauthorized alias, the penalty is imprisonment from one year to five years and a fine of P5,000 to
P10,000. For the violation of Circular 251, it is subject to the administrative sanction on the bank and/or
responsible directors/officers of fine up to P30,000 per transaction.
C. CONTINUED CONFIDENTIALITY/SECRECY OF DEPOSIT TRANSACTIONS
Q. Is confidentiality/secrecy of deposit accounts compromised with the issuance of Circular 251?
A. No. Circular 251 merely disallowed the opening of fictitious and anonymous accounts and has not in
any way modified nor lessened the safeguards and protection to depositors under RA 1405. This means
that, notwithstanding Circular 251, deposit accounts cannot be examined or looked into except under the
limited circumstances provided for in RA 1405.

Q. Why are the BSP and the BAP advocating the amendment to bank secrecy laws?
A. The proposal of BSP and BAP is for access to deposit accounts only under exceptional circumstances,
such as deposits only above the P50-million level and in relation to the commission of serious offenses
like racketeering and illicit drug trade. Except for these instances, depositors and those with legitimate
transactions remain protected under RA 1405. The objective of the proposal is to institute this measure as
an anti-money laundering campaign so as to delete the Philippines as a non-cooperative country in the
list of the Financial Action Task Force against money laundering
INCOME TAX
A. Income Tax Systems
There are three kinds of income tax systems:
o Global (unitary) tax system
Here, all items of gross income, deductions, personal and additional exemptions are reported in
one income tax return and a single tax is imposed on all income received or earned, regardless
of the activities which produced the income.
It is akin to putting all income into one basket and taxing the entire basket.
o

Schedular tax system

Here, different types of activities are subjected to different types of tax rates. The tax rates
depend on the classification of the taxable income ant the activities which produced the income.
Semi-global, semi-schedular system
Certain passive income and capital gains are subject to final taxes while other income are added
to arrive at the gross income (where deductions are used to arrive at the taxable income)
We follow the semi-global/semi-schedular system in the Philippines.
Schedular can also mean that tax rates will differ based on the tax base.
For instance, global is usually applied to corporations, as corporations are taxes at a single
rate, regardless of the tax base; while the schedular system is applied to individuals as they
are subjected to different tax rates based on their tax bracket.

D.

Situs of Taxation
Now that we know that only resident citizens and domestic corporations are taxed from income
sources worldwide, it is important to determine whether such income is realized in the Philippines or
abroad. This brings us to Section 42.

This section is NOT relevant to domestic corporations and resident citizens because they are
taxed worldwide anyway. This section comes into play when it comes to problems related to the
income sources of taxpayers who are only taxed for income sourced within the Philippines.
The following are treated as gross income from sources within the Philippines (Secs. 152-165,
Revenue Regulations No. [R.R.] 2-1940:

1. Interests including interests on bonds, notes and other interest bearing obligations:
a. The loan was used here in the Philippines, or
b. The debtor is in the Philippines
2. Dividends
a. From a domestic corporation; and
b. A foreign corporation, unless less than 50% of the gross income of the foreign
corporation was derived from the Philippines for the three-year period (the amount will
be based on the same ratio to dividends as the gross income for such period derived
from sources within Philippines to its gross income from all sources.)
i. For example, We make kaijus, Inc., a Japanese corporation, derives more than
50% of its gross income in the Philippines from the sale of kaiju action figures for
the past three years. If it declares dividends to a non-resident Filipino, the dividend
income will be considered sourced within the Philippines.
3. Services compensation for labor or personal services performed in the Philippines.
4. Rentals and Royalties from property located in the Philippines or from any interest in such
property for:
a. The use of any copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other similar stuff
b. The use of any industrial, commercial or scientific equipment
c. The supply of scientific, technical, industrial or commercial knowledge or info

d. The supply of services by a non-resident person in connection with those of property or

rights, or the installation or operation of any brand, machinery, or other apparatus
purchased form such non-resident person
e. Technical advise, assistance or services rendered in connection with technical
management of any scientific, industrial or commercial undertaking
f. The use of motion picture films, films for TV, tapes for radio broadcast
5. Sale of real property the gains, profits and income from sale of real property located in the
Philippines.
6. Sale of personal property gains, profits and income from sale of personal property, determined
by subsection (E).

The place of the signing of a contract is NEVER an issue or a factor for determining the source of
income.
Do not forget the turnkey contract case of CIR v. Marubeni (G.R. No. 137377, December 18, 2001),
when it comes to situs problems.
Expenses of a multinational corporation directly allocated or identified with the operations of the
Philippine branch. So, the company can claim as its deductible share a ratable part of such
expenses based upon the ratio of the local branchs gross income to the total gross income,
worldwide, of the multinational corporation. (CIR v. CTA and Smith Kline & French Overseas Co.,
G.R. No. L-54108, January 17, 1984)
The source of income is the property, activity, or service that produced the income.
o It is the place of activity creating the income which is controlling, and not the place of business or
residence of a corporation.
Hence, reinsurance premiums ceded to foreign reinsurers are considered income from
Philippine sources. (Howden & Co., Ltd. V. CIR, G.R. No. L-19392, April 14, 1965)
Also, the sale of airline tickets through a general sales agent in the Philippines is considered
income from Philippine sources, even if the tickets pertain to an airline company which does
not maintain any flights to and from the Philippines. (CIR v. British Overseas Airways
Corporation, G.R. No. L-65773, April 30, 1987, wherein the Court considered the sale of the
tickets as the source of income, and not the activity of actually transporting passengers)
When the sale is consummated within the Philippines (as in the title to the property was
transferred in the country), the situs of the sale is in the Philippines and is therefore taxable
here. (A. Soriano Y Cia v. CIR, G.R. No. L-5896, August 31, 1955)
Income

Test of Source of Income

Residence of DEBTOR
Income within

Interest income
Dividend Income:
1)

From domestic corporation

2)

From foreign corporation

Income within, if 50% or more of the gross income

of the foreign company (for the past 3 years) was
derived from sources within the Philippines
Income without, if less than 50% of the gross
income of the foreign company (for the past 3
years) was derived from sources within the
Philippines
Place of performance
Location of Property
Place of use of intangible
Location of property
Place of sale
Income within

Service Income
Rent income
Royalty income
Gain on sale of real property
Gain on sale of personal property
Gain on sale of domestic shares of stock

Gross income from sources outside (without) the Philippines.

1. Interests other than those derived from sources within
2. Dividends other than those derived from sources within
3. Compensation for labor or personal services performed outside the Philippines
4. Rentals or royalties from property located outside the Philippines or any interest in such property
5. Gains, profits, income from sale of real property located outside the Philippines
Income from sources partly within and partly without the Philippines.
For the gross income items allocated to sources partly within and partly without the Philippines,
o There shall be deducted the expenses, losses and other deductions properly apportioned,
and
o A ratable part of other expenses, losses and deductions which cannot properly be allocated to
some item of gross income.

If there is any remainder, it shall be included in full as taxable income from sources within the
Philippines

Situs of sale of personal property

Gains, profits and income derived from purchase of personal property within and sold without, or
from purchase without and sale within, are treated as derived entirely form sources with the
country in which it is SOLD.
Situs of sale of stocks in a domestic corporation
Gains from sale of shares of stock in a domestic corporation are treated as DERIVED ENTIRELY
from sources within the Philippines regardless of where the said shares are sold.
E.

Income Tax on Individuals

Now that we know how to determine where income is sourced, it is time to focus on the different
kinds of taxpayers. Let us begin with individual taxpayers.
Individual taxpayers are classified into:
1. Citizens, who are divided into:
Resident citizens those citizens whose residence is within the Philippines; and
Non-resident citizens those citizens whose residence is not within the Philippines.
2. Aliens, who are divided into:
Resident aliens those individuals whose residence is within the Philippines and are not citizens
thereof; and
Non-resident aliens those individuals whose residence is not within the Philippines but
temporarily in the country and are not citizens thereof. They are:
Those engaged in trade or business within the Philippines; and
Those who are not so engaged. (see NIRC, Sections 23-25)
It is important to know the definition of each kind of individual taxpayer because the tax liability of
each differs (as we shall see later).
Resident aliens
Resident alien is an individual:
1. Whose residence is within the Philippines, and
2. Who is not a citizen
Mere physical or body presence is enough, not intention to make the country ones abode. (Garrison
v. CA, G.R. No. L-44501, July 19, 1990)
An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of
the Philippines for purposes of income tax. Whether he is a transient or not is determined by his
intentions with regard to the length and nature of his stay.
o A mere floating intention indefinite as to time, to return to another country is not sufficient to
constitute him a transient.
o If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who
comes to the Philippines for a definite purpose which in its nature may be promptly accomplished
is a transient.
o But if his purpose is of such a nature that an extended stay may be necessary for its
accomplishment, and to that end the alien makes his home temporarily in the Philippines, he
becomes a resident, though it may be his intention at all times to return to his domicile abroad
when the purpose for which he came has been consummated or abandoned. (R.R. 2-1940)

The BIR has ruled that there is intention on the part of an alien to stay in the Philippines indefinitely
when the alien:
o Had a Special Resident Retirees Visa;
o Acquired real property and is actually present most of the time in the Philippines; and
o Registered as a taxpayer with the BIR. (BIR Ruling No, 252-11)

Non-resident citizens
Meaning of non-resident citizen:
1. Citizens who establishes to the satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein;
2. Citizen who leaves the Philippines during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis;
3. Citizen who works and derives from abroad and whose employment thereat requires him to be
physically present abroad most of the time during the taxable year;

4. Citizen who has been previously considered as nonresident citizen and who arrives in the
Philippines at any time during the taxable year to reside permanently in the Philippines shall
likewise be treated as a nonresident citizen for the taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad until the date of his arrival in
the Philippines.

Who are non-resident citizens? (R.R. 1-1979)

1. Immigrant one who leaves the Philippines to reside abroad as an immigrant for which a foreign
visa has been secured.
2. Permanent employee one who leaves the Philippines to reside abroad for employment on a
more or less permanent basis.
3. Contract worker one who leaves the Philippines on account of a contract of employment which
is renewed form time to tome under such circumstance as to require him to be physically present
abroad most of the time (not less than 183 days)

Non-resident citizens who are exempt from tax with respect to income derived from sources outside
the Philippines shall no longer be required to file information returns from sources outside the
Philippines beginning 2001. (R.R. 5-2001)

The phrase most of the time shall mean that the said citizen shall have stayed abroad for at least
183 days in a taxable year.
o However, citizens who work outside of the Philippines for at least 183 days in a taxable year due
to a contract of employment with a Philippines employer (such as employees seconded to a
foreign country) is not considered a non-resident citizen because they are not considered
employed abroad. They do not fall within Section 22(E)(3) because their employment remains
with the Philippines employer. (BIR Ruling No. 116-12)

The wage or income of an OFW/OCW which is earned from outside the Philippines is exempt from
income tax.
o An OCW is a Filipino citizen who:
Holds a job outside the Philippines;
Is physically present in that foreign country where the job is;
Is registered with the POEA;
Has valid overseas employment certificate;
Their salaries and wages are paid by an employer abroad and is not borne by any entity or
person in the Philippines. (R.R. 1-2011)

Non-resident aliens engaged in business in the Philippines

Who are non-resident aliens?
1. An individual whose residence is not within the Philippines, and
2. Not a citizen of the Philippines

One who comes to the Philippines for a definite purpose which in its nature may be promptly
accomplished is a transient or non-resident. (R.R. 2-1940)

Non-resident aliens are either:

o Engaged in trade or business, such as:
One who actually derives income in the Philippines, or
Stays in the Philippines for more than 180 days during any calendar year (deemed to be a
non-resident alien engaged in the Philippines, Section 25[A])
o Not engaged in trade or business.

Less of residence by alien

o An alien who has acquired residence in the Philippines retains his status until he abandons the
same and actually departs from the Philippines.
o A mere intention to change his residence does not change his status from resident alien to nonresident alien. An alien who has acquired a residence is taxable as a resident for the remainder
of his stay in the Philippines. (Section 6, R.R. 2-1940)

Minimum wage earner

Fixed by the Regional Tripartite Wage and Productivity Board.
Minimum wage earner:
o Private sector paid the statutory minimum wage
o Public sector not more than the statutory minimum wage in the non-agricultural sector where
he/she is assigned

Senior Citizens
Senior Citizens are
o Resident citizens of the Philippines, and
o Who are at least 60 years old
They are not exempt from income taxes unless they are considered minimum wage earners.
(R.A. 9994)

Senior citizens are granted a 20% discount from select establishments.

o Sales of goods and services by select establishments to senior citizens are also exempt from
VAT. (R.R. 7-2010)

Discounts for senior citizens are now treated as tax deductions for business, as per The Expanded
Senior Citizens Act of 2003 (R.A. 9257). This can be very bad for the taxpayer because he doesnt
get the peso for peso benefit which he would have gotten if it were considered a tax credit as
before. (M.E. Holdings Corp. v. CIR & CTA, G.R. No. 160193, March 3, 2008)

Persons with Disability

Persons with Disability (PWD) are:
o Individuals suffering from restriction or different abilities,
o As a result of mental, physical or sensory impairment to perform an activity in a manner or within
the range considered normal for human beings.

PWD are granted a 20% discount from selected establishments.

o These discounts can likewise be claimed as a deduction for businesses. (R.R. 1-2009)

Kinds of income and income tax of individuals

Before we get into the smallest details of the tax liabilities of each kind of individual, lets set down
some basic rules which will be helpful to remember:
Only resident citizens (and domestic corporations as we shall see later) are taxed on income derived
from abroad. Worldwide taxable!
For income received from sources within the oh and which are not subject to final withholding tax
(like passive income to be discussed below), a resident citizen, a non-resident citizen, a resident
alien, and a non-resident alien individual engaged in trade or business in the Philippines are all
subject to the graduated income tax rates in Section 24.
o But what about non-resident aliens not engaged in trade or business?
For non-resident aliens not so engaged, the tax rate is:
25% of the entire or gross income received from sources within the Philippines or
15% of the gross income received as compensation, salaries, and other emoluments by
reason of his employment by:
o Regional or area headquarters and regional operating headquarters of multinational
corporations;
o Offshore banking units establishment by a foreign corporation in the Philippines; or
o By foreign petroleum service contractor or sub-contractors operating in the
Philippines. (Section 25[A-E])
Income tax formula for individuals
It is important to note the basic formula to determine the taxable income of an individual. Think of
it as a road map where the different provisions of the code will plug into. The basic formula to determine
the taxable income of an individual is as follows:
Gross Income
Less: Deductions (either itemized of optional standard deduction)
Less: Personal/Additional Exemptions and Premium Payments on Insurance
Taxable Income
Tax Rate
Tax Due
Deductions
Individuals, except those who earn purely compensation income can claim deductions in two ways:
o Itemized deductions (which we will discuss in more detail), or
o Availing of the optional standard deduction (which is discussed below).
Engaged in trade or business, explained. The phrase engaged in trade or business within
the Philippines includes the performance of the functions of a public office or the performance of
personal services within the Philippines. (Sec. 8, Rev. Regs. No. 2)

10

To engage in business is uniformly construed as signifying to follow the employment or

occupation which occupies the time, attention, and labor for the purpose of a livelihood or profit.
A nonresident alien who shall come to the Philippines and stay there in an aggregate period of
more than one hundred eighty days during any calendar year shall be deemed a nonresident alien doing
business in the Philippines. (Sec. 25A)
The length of stay is the criterion. Hence, a non-resident alien shall not be considered engaged in
trade or business in the Philippines if he stays in the Philippines for less than 180 days notwithstanding
the fact that during such stay he actually performs personal services, or engages in a commercial activity
therein. And the whole period of more than 180 days must cover a calendar year.
The entire gross income of non-resident aliens not engaged in trade or business received from all
sources within the Philippines is subject to income tax. He must not be engaged in trade or business in
the Philippines.
The sources of the income are interests, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual or periodical or casual
gains, profits and income, and capital gains.
Tax Liability of Members of General Professional Partnerships (GPP). (Sec. 26)
The GPP as a juridical entity is exempted from income taxes. It would be the individual members
who will be liable on their net income share from the GPP.
A partner in a general professional partnership shall report in his income tax return, whether
distributed or not, his share of the profits of the partnership. If he reports his net share in the profits, he
shall be deemed to have elected the itemized deduction and may no longer claim the optional standard
deduction. In case he declares his distributive share in the gross income undiminished by his share in the
deduction, he may avail the 40% optional standard deduction in lieu of the itemized deduction.
Professional partnership. Your professional partnership of Certified Public Accountants is
exempt from income tax pursuant to Section 26 of the Tax Code, as amended. Accordingly, payments to
said partnership for professional services rendered are exempt from the withholding tax provisions of
Revenue Regulations No. 13-78 as amended by Revenue Regulations No. 6-79, both implementing
Section 50 (now 43) of the Tax Code, as amended by Presidential Decree No. 1351. (BIR Ruling No. 84142)
Professional partnership are not required to file income tax return. Requesting confirmation of
your opinion to the effect that professional partnerships are not required to file quarterly returns of their
income; and that individual partners of a professional partnership should not be required to file quarterly
returns if they received their shares in the net income of the partnership at the end of the calendar year or
the fiscal year of the partnership.
In reply thereto, I have the honor to inform you that pursuant to Sections 2 & 3, Revenue
Regulations No. 7-93 prescribing the procedures for the filing of quarterly returns and payment of the
quarterly income tax by individuals receiving self-employment income, a return of summary declaration or
gross income and deductions (BIR Form No. 1701 Q) for each of the first three quarters of the calendar
year, and a final or adjustment return (BIR Form No. 1701) shall be filed by all individuals, including
estates and trusts. The tax returns shall be filed on or before indicated dates:
First quarterly return
Second quarterly return
Third quarterly return
Final return

May 15 of the current year;

August 15 of the current year;
November 15 of the current year;
April 15 of the following year.

The corresponding income tax, as computed, shall be paid at the same time that the returns are
filed based on declarations of actual income and deductions for the particular quarter. The filing of the
returns and payment of taxes shall be in lieu of the filing of a declaration of estimated income for the
current taxable year and the payment of the estimated tax as provided for in Section 67(a) and (b) (now
60) of the NIRC primarily for the reason that the procedure prescribed in Section 67 (now 60) of the NIRC
of estimating the amount of income and tax to be paid by the individual.
Such being the case, your opinion that professional partnerships are not required to file quarterly
returns of their income is hereby confirmed. However, individual partners of a professional partnership are
required to file a return of summary declaration of gross income and deduction for each of the first three
quarters of the calendar year and a final or adjustment return. The corresponding tax, as computed, shall
be paid at the same time that the returns are filed based on declarations of actual income and deductions
for the particular quarter. (BIR Ruling No. 94-60)

11

Joint venture. A joint venture was created when two corporations while registered and operating
separately were placed under one sole management which operated the business affairs of said
companies as though they constituted a single entity thereby obtaining substantial economy and profits in
the operation. (Collector vs. Bantangas Transportation, et al, 102 Phil. 822; See also BIR Ruling Nos.
020(b)-020-80-187-82 dated June 3, 1982; 24-000-00-115-86 dated July 17, 1986; 069-90 dated May 9,
1990)
Thus, Empire Venture which has been constituted as a single entity whereby Empire and Uniphil
agreed to pool their resources for the development of a parcel of land and the construction of
condominium units thereon as well as the eventual sale of said units is a joint venture which is subject to
the 35% Section 27 of the Tax code, as amended. However, the respective 70% and 30% shares of
Uniphil and Empire from the profits of the joint venture are not subject to income tax Section 27 of the Tax
Code, as amended. (BIR Ruling No. 91-254)
Note: The term corporation mentioned in joint venture refers to a corporation as defined by the
corporation law.
Unregistered partnerships. They, in order to be subject to corporate income tax, must be
engaged in joint venture for profit. To constitute said unregistered partnership, the character of habituality
peculiar to business transactions for the purpose of gain must be present. (BIR Ruling No. 89-124)
STOCK DIVIDEND
- The payment by a corporation of a dividend in the form of shares usually of its own stocks
without change in per value.
- The stock distributed is a stock dividend. It is not subject to a dividend tax or passive income.
However, if the stockholder owns a common stock and the stock dividend is preferred stock
or vice versa, then the stock dividend is subject to tax because there is already change of
interest. Dividends out of quarterly profits. This refers to your letter requesting opinion as to whether
your company can declare cash and/or stock dividends out of quarterly profits and/or surplus.
It is represented that your company has been issuing cash and stock dividends for the last five (5)
years; that during the early part of this year, you have issued 50% dividend out of accumulated retained
earnings; and that since your company has been making profits as early as the first quarter of this year,
you intend to declare cash and/or stock dividend out of quarterly profit.
Ruling: An ordinary dividend is the most common type of corporate distribution, and is defined as
(1) a distribution of property by a corporation to its stockholder (2) made in the ordinary course of its
business (3) out of its earnings and profits. (par. 2251, 2d Am. Jur. 33) Thus, a dividend is a corporate
profit set aside, declared and ordered by the directors to be paid to the stockholders on demand or at a
fixed time. (Fisher vs. Trinidad, 43 Phil. 973)
It is distinguished from profits for the profits in thousands of a corporation do not become
dividends until they have been set apart, or at least declared, as dividends and transferred to the separate
property of the individual stockholders. Such being the case, your company can declare cash and/or stock
dividends out of its quarterly profit. (BIR Ruling No. 87-172)
Domestic Corporations and Foreign Corporations
The term domestic, when applied to a corporation means created or organized in the
Philippines or under its laws (Se. 22[C], NIRC), while the term foreign, when applied to a corporation,
means a corporation which is not domestic (Sec. 22[D], NIRC). The branches of a domestic corporation,
whether located in the Philippines or abroad, are merely extensions of the local head office. Accordingly,
their incomes in the Philippines and abroad of the head office and foreign branches are to be reported by
the Philippine head office in its corporate income tax return, and the branch profits remitted by its foreign
branches to the Philippine head office shall no longer be subject to the branch profit remittance tax
because (a) the income of the foreign branch had already been subjected to Philippine income tax, and
(b) the branch profit remittance tax applies only to Philippine branches of foreign corporations operating in
the Philippines operating in the customs territory and exempts from the tax profits remitted by the
Philippine branch operating in special economic zones to their head offices abroad.
A resident foreign corporation is a foreign corporation engaged in trade or business within the
Philippines (Sec. 22[H], NIRC), and a nonresident foreign corporation is a foreign corporation not
engaged in trade or business within the Philippines (Sec. 22[I], NIRC).
Test in determining Status of Corporations

12

Following the above provisions, it can be said that the Philippines adopted the law of
incorporation test under which a corporation is considered (a) as a domestic corporation,, if it is
organized or created in accordance with or under the laws of the Philippines, or (b) as a foreign
corporation, if it is organized or created in accordance with or under the laws of a foreign country.
Corollarily, a domestic corporation may be formed or organized by foreigners under the Philippine
Corporation Code, provided that it is organized under the laws of the Philippines. On the other hand, a
corporation established by Filipino citizens under the laws of a foreign country will be treated as a foreign
corporation, and the branch that such foreign corporation sets up in the Philippines is a resident foreign
corporation. In other words, the nationality of the owners of the corporation has no bearing in ascertaining
the status or residence of corporations, for income tax purposes.
Doing Business
The term doing business implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of commercial gain or for the purpose of business
organization. In order that a foreign corporation may be regarded as doing business within a State, there
must be continuity of conduct and intention to establish a continuous business, such as the
appointment of a local agent, and not one of a temporary character (BOAC v. Commissioner, 149 SCRA
395).
Partnerships
Except for a general professional partnership and an unincorporated joint venture or consortium
in construction or energy-related projects, which in reality are also partnerships, Section 22(B) of the 1997
Tax Code considers any other type of partnership (described here as business partnership) as a
corporation subject to income tax. Indeed, Section 24(B) of the 1997 Tax Code places a business
partnership and an ordinary corporation on a similar footing, by imposing the 10% dividend tax on the
cash and/or property dividends actually or constructively received by an individual stockholder of a
corporation, or in the distributable net income after tax of a partnership of which he is a partner, except a
general professional partnership, received by a partner. The term after-tax net profit means the net
profit of the partnership computed in accordance with generally accepted principles of accounting, less
the corporate income tax imposed in Section 27 of the Tax Code (Sec. 2 Rev. Regs. No. 2-84, January
16, 1984). Sec 73(D) of the 1997 Tax Code, however, provides that the taxable income declared by a
partnership for a taxable year which is subject to tax under Section 27(A) of this Code, after deducting the
corporate income tax imposed therein, shall be deemed to have been actually or constructively received
by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether
actually distributed or not.
Joint Ventures
Elements of joint venture. To constitute a joint venture, certain factors are essential. Thus,
each party to the venture must make a contribution, not necessarily of capital, but by way of services,
skill, knowledge, material or money; profits must be shared among the parties; there must be a joint
proprietary interest and right of mutual control over the subject matter of the enterprise; and usually, there
is single business transaction (BIR Ruling No. 317-92).
Exempt joint venture or consortium is an unincorporated joint venture or consortium
engaged in construction activity or energy-related project. The term joint venture or
consortium, referred to in Section 22(B) of the 1997 Tax Code that is not considered as a separate
taxable entity, means an unincorporated entity formed by two (2) or more persons (individuals,
partnerships or corporations) for the purpose of undertaking construction project (P.D. 929, May 4, 1976),
or engaging in petroleum and other energy operations with operating contract with the government. The
term joint venture was clarified by the Secretary of Finance when he issued Revenue Regulations
No. 10-2012 on June 1, 2012. In said Regulation, the joint venture that is not taxable as a corporation
must comply with the following requisites: (a) the joint venture or consortium is formed for the purpose of
undertaking construction activity; (b) It involves jointing or pooling of resources by licensed local
contractors; i.t., licensed as a general contractor by the Philippine Contractors Accreditation Board
(PCAB) of the Department of Trade and Industry; (c) the local contractors are engaged in construction
business; and (d) the joint venture itself is licensed as such by PCAB. If all the above requisites are not
met, the joint venture becomes liable to the corporate income tax. Each member of the joint venture not
taxable as a corporation shall report and pay taxes on their respective shares to the joint venture profit.
Since it is not considered as a separate taxable entity, the net income or loss of the joint venture or
consortium is taken up and reported by the co-venturers or consortium members in accordance with their
participation in the project as set forth in their agreement. The participation in the project as set forth in
their agreement. The two (2) elements unincorporated entity (or entity not registered with the Securities
and Exchange Commission) and for the purpose of undertaking construction or energy-related project

13

must be present in order that the joint venture or consortium may not be considered as a separate taxable
entity.
Tax-exempt joint venture shall not include those who are mere suppliers of goods, services or
capital to a construction project.
Joint Venture (JV) involving foreign contractors may be treated as non-taxable corporation only if:
1. Member foreign contractor is covered by a special license as contractor by PCAB; and
2. Construction project is certified by the appropriate Tendering Agency (government office) that
the project is a foreign-financed/internationally-funded project and that international bidding is
allowed under the Bilateral Agreement entered into by and between the Philippine
government and the foreign/international financing institution, pursuant to the rules and
regulations of R.A. 4566 (Contractors License Law)
Each member of the joint venture not taxable as corporation shall report and pay taxes on their
respective shares on the joint venture profit, received by a joining corporation.
All licensed local contractors must enroll to BIRs eFPS at the RDO where local contractors are
registered as taxpayers.
Foreign joint venture or consortium that does not sell goods nor perform services in the
Philippines. A joint venture or consortium formed among non-resident foreign corporations in
connection with a local project in the Philippines is not subject to Philippine income tax, where said
foreign joint venture or consortium does not sell goods nor perform any service in the Philippines. This
rule is anchored on the fact that a foreign corporation is taxable only on income from sources within the
Philippines (BIR Ruling No. 23-95). Accordingly, no withholding tax is required to be deducted and
withheld by the Philippine payor from income payments from foreign sources made to the foreign joint
venture or consortium.
Exempt joint venture or consortium may become taxable partnership. An exempt joint
venture or consortium undertaking a construction of office tower project may subsequently become
subject to income tax as a separate joint venture or consortium, where after the construction period, the
joint venture partners engaged in the business of leasing the building floors or portions thereof separately
owned by them (BIR Ruling No. 317-92, October 28, 1992). The tax exemption of the joint venture
granted under the law is valid only up to the completion of the construction project and does not extend to
the subsequent sale or lease of the developed condominium floors or units to customers.
BIR Rulings prior to Revenue Regulations No. 10-2012:
Corporations does not include joint venture undertaking construction activity; allocation
of floors, units, or lots is a mere return of capital. The joint ventures described above are not subject
to corporate income tax under Section 27 of the 1997 Tax Code, since the term corporation does not
include a joint venture or consortium formed for the purpose of undertaking construction projects pursuant
to Section 22(B) of the 1997 Tax Code. Accordingly, the memorandum of agreement, joint venture
agreement, or exclusive development and marketing agreement between or among the contracting
parties, as the case may be, will not give rise to a taxable joint venture, and the allocation of specific
floors or units or subdivision lots in the project is not a taxable event and is not subject to income tax and
expanded withholding tax, because the allocation is a mere return of the capital that each party has
contributed to the project.
Transfer of land to joint venture is similar to capital contribution; distribution of developed
lots/units is merely an act of partitioning commonly owned property. Joint venture agreements for
the construction and development of real property may or may not be treated as a separate taxable unit,
depending on whether or not a separate taxable unit, depending on whether or not a separate taxable
entity is established by the joint venture partners. If the parties did not form nor register a separate entity
and merely agreed to pool their resources to a common fund, no separate taxable unit is created. In this
case, each joint venture partner has to account for his respective share in the net revenue earned from
the joint venture project separate income tax returns partners. Hence, the partners may file separate
income tax returns for its net revenue for the project less its respective proportionate share in the joint
venture expenses. The contribution of land to the joint venture is not a taxable event that will give rise to
capital gains tax on sale or transfer of land. Such transfer is similar to a capital contribution that does not
give rise to income tax. The distribution of developed lots/units is merely an act of partitioning the
commonly owned property. It is nothing more than an act of terminating the co-ownership by making each
partner specific owner of the identifiable lot or unit. At this stage, no taxable sum has yet been realized by
the joint venture partners. That act of allocation or assigning portions of the developed lots to each
member of the joint venture cannot be treated as a taxable event. The same is true despite the fact that
the shares allocated to or received by the partners may not necessarily correspond to the lot area
originally contributed by them to the joint venture. Hence, the titling of the land back to the joint venture
partners is not subject to income tax, expanded withholding tax, and value added tax (BIR Ruling DA165-03-18-99).

14

Sale of developed floor, unit or lot is subject to income tax. Should the corporate
landowner or developer sell any of the floors or portions of the floors allocated to them to third parties, the
gain that may be realized by them from such sale will be subject to the regular corporate income tax and
to the expanded withholding tax under Revenue Regulations No. 6-85 (now Rev. Regs. No. 2-98), as
amended (BIR Ruling No. 274-92, September 30, 1992). This rule applies even if the sale takes place
before or during the construction period.
Taxable Joint Ventures
There are two (2) instances when a joint venture becomes a taxable entity. First, a domestic
corporation jointly owned by individuals and by two or more existing domestic corporations and/or foreign
corporations that is incorporated under the laws of the Philippines (e.g., D.M. Consunji, Inc.), or duly
registered with or licensed by the Securities and Exchange Commission [e.g., Marubeni Corporation
Philippine Branch] is a taxable corporation, even if it is engaged in the business of construction or energyrelated activity. Second, if the unincorporated joint venture or consortium (or unregistered partnership) is
engaged in any other line of business than construction or energy-related activity with operating contract
with the government, the same will also be treated as a taxable corporation. The income and expenses of
the taxable joint venture must be reported by it during the taxable year.
Immediacy Test Improperly Accumulated Earnings Tax (Cyanamid vs. CA, G.R. No. 108067,
January 20, 2000)
Taxation of Co-ownership (Read)
1. Ona vs. Commissioner, 45 SCRA 74
2. Pascual vs. Commissioner, 166 SCRA 560
3. Obillos vs. Commissioner, 139 SCRA 436
Section 30
- Exemption from Tax on Corporations. The corporations covered by this section are
exempted from income tax because it is generally organized not for profit but exclusively for the benefit of
their respective members. So that no income inuring to the benefit of the individual members but for the
benefit of the organization as a whole.
However, a corporation is not simply exempted from tax because it is not organized and operated for
profit, it is still subjected to income tax no matter how these corporation are created. Hence, if they will
have income of whatever kind and character from any of their properties real or personal or from any of
their activities conducted for profit regardless of the disposition made of such income, they will be liable
for income tax.
For instance a non-profit corporation will sell their property and derive income therein, that income
would be subjected to income tax.
The rule that regardless of their disposition made of such income do not apply to non-profit
educational institution, because under the constitution all revenues and assets of these institutions it
actually, directly and exclusively used for educational purposes will make these institution exempted from
all taxes. Thus, if Xavier University, for example, who is a non-stock, non-profit educational institution will
use their rental income from the gym for education purposes, the same is not subject to income tax.
However, if the gym rental is used for charitable purposes it would already be subjected to income tax
because what the constitution provides is only to educational purposes.
READ :

1) CIR vs. Court of Appeals, 298 SCRA 83

2) Commissioner vs. YMCA, G.R. No. 124043, October 14, 1998
3) CIR vs. St. Luke, G.R. No. 195909 60, September 26, 2012

Section 31
- Taxable Income means Gross Income, less deductions and/or personal and
additional exemptions.
The following are the deductions under the tax code:
1. Business deduction (Sec. 34, par. A J and M): available to corporations or individual taxpayer
who are taxed on taxable income derived from business, trade, or exercise of profession.
2. Optional standard deduction (Sec. 34, par. L); available to corporations or individual taxpayer who
are taxed on taxable income derived from business, trade, or exercise of profession.
3. Personal exemptions (Sec. 35): only individuals allowed who are also taxable based on taxable
income.
4. Premium on health insurance / Hospitalization insurance: only individuals allowed who are also
taxable based on taxable income.
Section 32

Gross Income

15

(A) General Definition the term all income derived from whatever source means from legal or
illegal sources.
The enumeration of items of income from no. 1 to 11 is not exclusive. Meaning that incomes that are
not mentioned in the enumeration are also included as part of gross income.
Sources of income might be from the following activity:
1.
2.
3.
4.
5.
6.

Exercise of profession;
Services rendered;
Rentals;
Profits from sale or exchange of asset;
Business or trade;
And from other sources such as interest in bank deposits, dividends, and royalties.

Definition of Income
Income means an amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment. Unless otherwise specified, income
means cash or its equivalent (Conwi v. CTA and Commissioner, 213 SCRA 83). Income is a flow of
service rendered by capital by the payment of money from it or any other benefit rendered by a fund of
capital in relation to such fund through a period of time (Madrigal v. Rafferty, 38 Phil. 414). Income covers
gain derived from capital, from labor, or from both combined, provided it be understood to include profit
gained through a sale or conversion of capital assets (Fisher v. Trinidad, supra). Income includes
earnings, lawfully or unlawfully acquired, without consensual recognition, express or implied, of an
obligation to repay and without restriction as to their disposition (James v. U.S., 366 U.S. 213). Thus,
income from illegal drug and gambling activities is taxable as well.
Income may include: (a) increase in inventory at the end of the taxable year; however, mere
increase in the value of property is not income but increase in capital; (b) transfer of appreciated property
to employee for services rendered; and (c) just compensation paid by government for property acquired
by expropriation.
Income is an amount of money coming to a person within a specified time, whether as payment of
services, interests or profits from investments.
Presumed Gain (Capital Gains on Sale of Real Property) is also income.
Gain is synonymous with income.
Gain may be derived from capital, labor or both.
Income in taxation does not solely mean profit. Hence, SP may be considered an income if provided
by law. But capital is never treated as Income.
Profits or gain may also derive through sale or conversion of an asset.
There is no statutory definition of income under the tax code. However, under Section 36 of the
Revenue Regulation No. 2, income is defined that in its broad sense, means all wealth which flows into
the taxpayer, other than as a mere return of capital.
An income to be considered as taxable must be:
1. Actually or constructively received;
2. It must be realized.
Test in determining INCOME.
a. Realization test. There is no taxable income until there is a separation from capital of
something of exchangeable value, thereby supplying the realization or transmutation which
would result in the receipt of income (Eisner v. Macomber, 252 U.S. 189). Thus, stock
dividends are not income subject to income tax on the part of the stockholder, because he
merely holds more shares representing the same equity interest in the corporation that
declared the stock dividends (Fisher v. Trinidad, supra).
b. Claim of right doctrine. A taxable gain is conditioned upon the presence of a claim of right
to the alleged gain and the absence of a definite unconditional obligation to return or repay
that which would otherwise constitute a gain. To collect a tax would give the government an

16

unjustified preference as to the part of the money that rightfully and completely belongs to the
victim. The embezzlers title is void (Commissioner v. Wilcox, 286 U.S. 417, 424).
On May 27, 1977, Dolores Ventosa requested the transfer of US$1,000 from the First
National Bank, West Virginia to Victoria Javier in Manila through the Prudential Bank.
Accordingly, the First National Bank requested the Mellon Bank to effect the transfer.
Unfortunately, the wire sent by Mellon Bank to Manufacturers Hanover Bank, a
correspondent bank of Prudential Bank, indicated the amount transferred as
US$1,000,000.00 instead of US$1,000.00. Hence, Manufacturers Hanover Bank
transferred one million dollars less bank charges to Prudential Bank for the account of
Victoria Javier. On June 3, 1977, Javier opened a new dollar account (No. 343) in the
Prudential Bank and deposited $999,943.70. Immediately thereafter, Victoria Javier and
her husband, Melchor Javier, Jr. made withdrawals from the account, deposited them in
several banks only to withdraw them later in an apparent plan to conceal, lauder and
dissipate the erroneously sent amount. Spouses Melchor and Victoria Javier filed their
consolidated income tax return for the ear with the notation The taxpayer was the
recipient of some money from abroad which he presumed to be a gift but turned out to
be an error and is now subject of litigation, but they did not declare it as income. The
court ruled that the amount received is income subject to tax, but the tax return filed
cannot be considered as fraudulent because petitioner literally laid his cards on the
table for respondent to examine. Error or mistake of fact or law is not fraud
(Commissioner v. Javier, 199 SCRA 824).
c. Income from whatever source. All income not expressly excluded or exempted from the
class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in
producing the income, and regardless of the source of income, is taxable (Blas Gutierrez v.
Collector, 101 Phil. 713).
d. Economic benefit test. Any economic benefit to the employee that increases his networth
(i.e., total assets less total liabilities), whatever may have been the mode by which it is
effected, is taxable. Thus, in stock options, the difference between the fair market value of the
shares at the time the option is exercised and the option price constitutes additional
compensation income to the employee at the time of exercise (not upon the grant or vesting
of the right) (Commissioner v. Smith, 324 US 177).
e. Severance test as capital or investment is not income subject to tax, the gain or profit
derived from the exchange or transaction of said capital by the taxpayer for his separate use
benefit or disposed income subject to tax.
f. Substantial alteration of interest lost income to be returnable for taxation must be fully
and completely realized. When there is no separation of gain or profit, or separation of the
increase in value from capital, there is no income subject to tax.
g. Flow of wealth test anything/implying existence of capital
a) Capital is fund income is the flow;
b) Capital is wealth income service of wealth;
c) Property is tree income is fruit;
d) Labor is tree income is fruit.
All of the following tests are followed in the Philippines for purposes of determining whether
income is received by the taxpayer of not during the year.
Significance of knowing the Type of Character of Income
In general, it is important to know the types of income realized by the taxpayer, since the
Philippines has adopted the semi-global or semi-schedular tax system. Under this tax system,
compensation income, and other income not subject to final income tax, are added together to arrive at
the amount of gross income of an individual, and after deducting the allowable deductions from business
and professional income, capital gains, passive income, and other income not subject to final income tax
as well as personal and additional exemptions, if qualified, the graduated income tax rates ranging from
five percent (5%) to 32% are applied in the resulting net taxable income to arrive at the income tax due
and payable.
The passive investment income are generally subject to the final withholding tax; hence, the
income recipient does not file a tax return covering such passive investment incomes, although the
withholding agent-payor of income is held responsible under the law to deduct, withhold and remit the
final income tax thereon to the BIR.
Capital assets subject to the final capital gains tax such as shares of stock of a domestic
corporation and real property located in the Philippines, except when sold or transferred by a dealer in
securities or real estate dealer, are covered by the capital gains tax return; hence, not included in the
taxable income of the individual taxpayer subject to the global tax system and the graduated income tax
rates.

17

The rules for individuals discussed above apply also to a corporation, except that the corporation
does not receive compensation income and are not entitled to deduct personal and additional exemptions
from their gross income during the year.
Compensation Income
In general, the term compensation means all remuneration for services performed by an
employee for his employer under an employer-employee relationship (See Sec. 2.78.3, Rev. Regs. No. 298, as amended), unless specifically excluded by the Tax Code. In determining the existence of an
employer-employee relationship, the elements that are generally considered are: (a) the selection and
engagement of the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the
employers power to control the employee with respect to the means and methods by which the work is to
be accomplished. It is the so-called control test that is the most important element (Brotherhood Labor
Unity Movement of the Philippines v. Zamora, L-48645, January 7, 1987).
Who is an employee?
For taxation purposes, a director is considered an employee under Section 5 of Revenue
Regulations No. 12-86, to wit: An individual, performing services for a corporation, whether as an officer
and director or merely as a director whose duties are confined to attendance at and participation in the
meetings of the Board of Directors, is an employee. The non-inclusion of the names of some of
petitioners directors in the companys Alpha List for 1997 does not ipso facto create a presumption that
they are not employees of the corporation, because the imposition of withholding tax on compensation
hinges upon the nature of work performed by such individuals in the company. Moreover, Section
2.57.2.A(A) of Revenue Regulations No. 2-98 cannot be applied to this case as the latter is a later
regulation, while the accounting books examined were for the year 1997 (First Lepanto Taisho Insurance
Corporation v. CIR, G.R. No. 197117, April 10, 2013). [NOTE: Beginning 1998, a director who is not an
officer or employee of a corporation is NOT an employee of said corporation; hence, the applicable
withholding tax to be deducted from such income shall be 10% EWT, which is creditable against his
ordinary income tax liability for the year, provided it is evidenced by BIR Form 2307. However, said
directors fee is taxed also under the global tax system].
The term employee refers to any individual who is the recipient of wages and includes an
officer, employee or elected official of the government or any political subdivision, agency or
instrumentality thereof. It includes also an officer of a corporation. Thus, a juridical entity that performs
services to another person is not an employee of the latter. Accordingly, the proper withholding tax on
such income payment is the expanded withholding tax (not withholding tax on compensation income). To
create an employer-employee relationship, the person that performs the service to another must be an
individual.
The term compensation income means all remuneration for services performed by an
individual employee for his employer, including the cash value of all remuneration paid in any medium
other than cash. There are various types of taxable compensation income, such as salaries, wages,
bonus, remuneration, honorarium, benefits and allowances (including representation and transportation
allowance (RATA), personal emergency relief allowance (PERA), longevity pay, subsistence allowance,
hazard pay, annuities, pensions, etc. Additional compensation allowance (ACA) given to government
employees pursuant to E.O. 219 shall not be subject to withholding tax pending its formal integration into
the basic pay. While its nature shall continue to be that of compensation, it shall be treated as part of the
other benefits which are excluded from compensation income, provided that the total amount does not
exceed 30,000 (BIR ruling No. 034-2002, August 16, 2002 modified BIR ruling No. 179-99, November
22, 1999). BIR Ruling Nos. 120-96, November 8, 1996 and 062-2000, November 20, 2000 exempt
benefits and allowances such as longevity pay, subsistence allowance, and hazard pay granted to
uniformed policemen and jail guards under R.A. 6975 (DILG Act of 1990). However, if the recipient is
an AFP personnel, all remunerations (monetary and non-monetary) are taxable, except allowances for
quarters, clothing and subsistence which are exempt from income tax pursuant to RMC 15-87 (BIR
Ruling No. 143-96, December 24, 1996).
Compensation Income of Philippine Nationals and Aliens Employed by Foreign Governments and
International Organizations in the Philippines
Section 23 of the Tax Code lays down the general principles in taxing citizens and alien
individuals. Resident citizens are taxed on worldwide income, while resident aliens are taxed only on their
Philippine-source income. As an exception to the general rule, most international agreements which grant
withholding tax immunity to foreign governments/embassies/diplomatic missions and international
organizations also provide exemption to their officials and employees who are foreign nationals and/or
non-Philippines residents from paying income taxes on their salaries and other emoluments.
Since the withholding tax is merely a method of collection of income tax, the exemption from
withholding taxes on compensation income of foreign governments/embassies/diplomatic missions and

18

international organizations does not equate to the exemption from paying the income tax itself by the
recipients of said income.
Foreign Embassies and Diplomatic Missions
Articles 34 and 37, Vienna Convention on Diplomatic Relations, exempts: (a) diplomatic agents
who are not nationals or permanent residents of the Philippines; (b) members of family of diplomatic
agent forming part of his/her household who are not Philippine nationals; (c) members of administrative
and technical staff of the mission plus members of their families who are not Philippine nationals or
permanent residents of the Philippines; (d) members of service staff of the mission who are not Philippine
nationals or permanent residents of the Philippines; and (e) private servants of members of the mission
who are not Philippine nationals or permanent residents of the Philippines. The applicable rules are as
follows:
Aid Agencies of Foreign Governments
JICA: Only JICA resident representatives and his/her staff who were dispatched from japan
shall not be subject to Philippine income tax.
GIZ: (Germany): Only German specialist of German construction and consulting firms shall be
exempt.
AUSAID: Salaries and other remuneration paid by the Government of Australia or by Australian
personnel, firms, institutions or organizations to any person performing work under the
Memorandum shall be exempt.
CIDA: Only Canadian personnel who derive income from Canadian aid funds as provided under
the subsidiary agreement shall be exempt.
Advisory Committee on Voluntary Foreign Aid-USA
CARE: Only Care employees who are not Philippine nationals are exempt.
FPPI or PLAN: Only non-Filipino staff members of the PLAN who receive salaries and stipends in
US dollars shall be exempt.
Aid Agencies
Ford Foundation, Rockefeller Foundation, Agricultural dev Council, and Asia Foundation: only
non-Filipino staff members thereof who receive salaries and stipends in US dollars shall
be exempt.
IRRI (PD 728 and RA 3538)
Catholic Relief Services NCWC and Tools for Freedom Foundation (R.A. 4481)
Asian Development Bank (ADB) Section 45(b), Article XII of the Agreement between ADB and
RP: Only officers and staff of ADB who are not Philippine nationals shall be exempt from Philippine
income tax (because exemption is subject to the power of the Government to tax its nationals. Any
exemption from Philippine income tax must be granted under duly recognized international agreements or
particular provisions of existing law. Affected individuals (of foreign embassies and international
organizations) who were not granted such exemption must file their income tax returns and pay the tax
due thereon on or before the 15th day of April following the close of the taxable year (RMC 31-2013, April
12, 2013).
Statutory Minimum Wage
Compensation income falling within the meaning of statutory minimum wage (SMW) under
R.A. 9504, effective July 6, 2008, as implemented by Revenue Regulations No. 10-2008 dated July 8,
2008, shall be exempt from income tax and withholding tax. Holiday pay, overtime pay, night shift
differential pay, and hazard pay earned by Minimum Wage Earner (MWE) shall likewise be covered by the
above compensation such as commissions, honoraria, fringe benefits. Benefits in excess of the allowable
statutory amount of 30,000, taxable allowances and other taxable income other than the SMW, holiday
pay, overtime pay, hazard pay and night shift differential pay, shall not enjoy the privilege of being a MWE
and, therefore, his/her entire earnings are not exempt from income tax and withholding tax.
Hazard pay shall mean the amount paid by the employer to MWEs who were actually assigned
to danger or strife-torn areas, disease-infested places, or in distressed or isolated stations and camps,
which expose them to great danger of contagion or peril to life. Any hazard pay paid to MWEs which does
not satisfy the above criteria is deemed subject to income tax and withholding tax.
When an award of backwages is made, there is an acceptance that the employee was illegally or
unjustly dismissed, and the backwages are the salaries he was supposed to have earned had he not
been dismissed. It is as though he was not separated from employment, and as though he actually
rendered service (Escareal v. Court of Tax Appeals, et al., CA-GR SP No. 41989, September 30, 1998). In
this connection, RMC 39-2012 dated August 3, 2012 provides that the employee should report as income
and pay the corresponding income taxes by allocating or spreading his back wages, allowances and
benefits through the years from his separation up to the final decision of the court awarding the

19

backwages. The said backwages, allowances and benefits are subject to withholding tax on wages.
However, when the judgment awarded in a labor dispute is enforced through garnishment of debts due to
the employer or other credits to which the employer is entitled, the person owning such debts or having in
possession or control of such credits (e.g.., banks or other financial institutions) would normally release
and pay the entire garnished amount to the employee. As a result, employers who are mandated to
withholding taxes on wages pursuant to Section 79 of the Tax Code, as implemented by Revenue
Regulations No. 2-98, cannot withhold the appropriate tax due thereon. In this regard, the employer also
refers to the person having control of the payment of the compensation in cases where the services are or
were performed for a person who does not exercise such control. Thus, the person owning or having
possession or control of the credit shall withhold the required tax.
Backwages, Allowances, and Benefits Awarded in Labor Dispute
Backwages, allowances, and benefits awarded in a labor dispute constitute remuneration for
services that would have been performed by the employee in the year when actually received, or during
the period of his dismissal from the service which was subsequently ruled to be illegal.
The employee should report as income and pay the corresponding income taxes by allocating or
spreading his backwages, allowances and benefits thru the years from his separation up to the final
decision of the court awarding the backwages.
The backwages, allowances, and benefits are subject to withholding tax on wages.
However, when the judgment awarded in a labor dispute is enforced thru garnishment of debts or
having in possession or control of such credits (e.g., banks or other financial institutions) would normally
release and pay the entire garnished amount to the employee. As a result, employers who are mandated
to withhold taxes on wages cannot withhold the appropriate tax due thereon.
In order to ensure the collection of the appropriate withholding tax on wages, garnishees of a
judgment award in a labor dispute are constituted as withholding agents with the duty to withhold tax on
wages equivalent to five percent (5%) of the portion of the judgment award, representing the taxable
backwages, allowances and benefits (RMC 39-2012, August 3, 2012).
Items Not Included as Compensation Income
Compensation shall not include remuneration paid: (a) for agricultural labor paid entirely in
products of the farm where the labor is performed; or (b) for domestic service in a private home; or (c) for
causal labor not in the course of the employers trade or business; or (d) for services by a citizen or
resident of the Philippines for a foreign government or an international organization (Sec. 78[A], NIRC).
As a general rule, the income recipient is the person liable to pay the income tax. In order to
improve the collection of income on the compensation income of employees, the State requires the
employer to withhold the tax upon payment of the compensation income, such that at the end of the
calendar year, the employee needs only to file a tax return and no tax is paid, because his total
withholding tax during the year is equal to his income tax liability. [Beginning 2002, qualified employees
need not file their income tax returns and the employer may file a substituted return for its employees.]
Other Income

Income from any source whatever

The phrase income from any source whatever is broad enough to cover gains contemplated
here. These words disclose a legislative policy to include all income not expressly exempted within the
class of taxable income under our laws, irrespective of the voluntary or involuntary action of the taxpayer
in producing the gains (Blas Gutierrez v. Collector, supra).
Any economic benefit to the employee, whatever may have been the mode by which it is
implemented, is income subject to tax. Thus, in stock options, the difference between the fair market
value of the shares at the time the option is exercised and the option price constitutes additional
compensation income to the employee (Commissioner v. Smith, supra). A stock option is a right, but not
an obligation, to purchase (call option) or sell (put option) a specified number of shares at a fixed price
before or at a certain date in the future
The principle underlying the taxability of an increase in the net worth of a taxpayer rests on the theory
that such an increase in net worth, if unreported and not explained by the taxpayer, comes from
income derived from a taxable source. In this case, the increase in net worth was not the result of the

20

receipt by it of taxable income. It was merely the outcome of the correction of an error in the entry in its
books relating to its indebtedness to the insurance company. The income tax law imposes a tax on
income; it does not tax any or every increase in networth whether or not derived from income (Fernandez
Hermanos, Inc. v. Commissioner, CTA Case 787, June 10, 1963)
READ : Madrigal vs. Rafferty , 38 Phil. 414
The tax code did not indicate the source of income (Blinds Sources). What it enumerates are specific
items of income.
Are the following items considered income?
1. Found treasure other forms of gain;
2. Punitive damages/damages for breach of promise or alienation of affection;
3. Recovery of bad debts;
4. Tax refund;
5. Non-cash benefits;
6. Income from illegal sources;
7. Prizes, scholarship, fellowship;
8. Forgiveness of debt.
In the case of Commissioner vs. Tours Specialist, 183 SCRA 402, the Supreme Court stated that
taxable income, however, does not include items received which do not add to the taxpayers net worth or
redound to his benefit such as amounts merely deposited or entrusted to him.
The following are not income: (a) deposit of property that does not increase networth of taxpayer
(e.g., the increase in asset has a corresponding increase in liability); (b) increase in networth is due to
correction of errors in book entries; (c) voluntary assessments by a corporation paid by its shareholders
under Revenue Regulations No. 2; (d) security deposit paid to a lessor until it is applied in payment of
accrued rent; (e) contributions by lot owners for the memorial park care fund; and (f) loan proceeds
received by the borrower.
(B) Exclusion from Gross Income an income can be exempted from taxes based on the following
reasons:
1. Exemption by the fundamental law of the land;
2. Exempted by the statute;
3. It does not come within the definition of income such as stock dividend or increase in the
appraisal of the FMV of the property.
Some Principles:
A tax free income is different from a tax free organization.
Doctrine of Constructive Receipt of Income means that it was already set aside, without limitations,
restrictions or conditions for its withdrawal. Example share of the partner in a general partnership.
Doctrine of Cash Equivalent in Transaction means that if a property is exchanged with another
property the difference of a Fair Market Value (FMV) would be considered income.
The Material Benefit rule (CIR vs. Javier, 199 SCRA 824), means that under the solutio indebiti rule,
if the holder of the property has the obligation to return it and instead use it for his own benefit, the
amount to be returned would be considered an income.
Exclusions from Gross Income simply means that these incomes are not subject to income tax:
There are only instances an item of income would not be subjected to income tax:
1. If it is exempted by the Constitution.
2. If it is exempted by the statute or law.
3. When it does not come within the definition of income.
Example: increase of appraisal value of the property
1. Life Insurance proceeds of life insurance being only an indemnity of life lost is not subject to
income tax. However, it can be subjected to estate tax if the rules of the estate taxes will apply. If
it is an accident insurance and it includes coverage of life insurance the proceeds would not be
subjected to income tax.
2. Return of Premium not subject to income tax because it is just a mere return of capital.
3. Gifts, Bequests, and Devises not subject to income tax but subject to estate tax or donors tax.
4. Compensation for Injuries or Sickness includes physical, moral and psychological injuries.
Lost profits recovered are subject to income tax.

21

5. Income Exempt under Treaty would not be subject to tax because of the treaty (International
Comity) entered into by the government with other countries.
6. Retirement Benefits covered by a private benefit plan maintained by the employer would be
exempted from income tax if the following conditions will be present:
(1)
(2)
(3)

The retiring employee is in the service of the same employer for at least ten (10) years;
He is not less than fifty (50) years of age at the time of retirement.
You retired under the private benefit plan of the employer.
The aforestated conditions would be applicable if there is a reasonable private benefit plan of the
employers.
Retiring person which has no private retirement plan by the employer:
A. Private Employee - labor code will govern. Requirements are the following:
(1) At least sixty (60) years old but not more than sixty-five (65) years old.
(2) Has served at least five (5) years of service with the same employer.
(3) Entitled retirement salary for every year of service but not less than one month salary.
If it is a government employee, retirement will be governed either by the retirement plan of the
government agency or by the GSIS.

B. Pseudo retirement, or involuntary retirement, or compulsory retirement.

Involuntary retirement is present if the employee did not ask, did not initiate, and it is not of his own
choice that he is retired. The reasons may be because of the death, sickness or other physical disability,
or for any cause beyond the control of the said official or employee. Some other grounds like
retrenchment, redundancy, closure of business, are also other forms of involuntary retirement. The
retirement benefits received from involuntary retirement not subject to income tax.
BIR Ruling No. 071-95, April 11, 1995 retirement under CBA is taxable for being voluntary. If the
company has no BIR approved retirement plan an employee who is separated against his will but who
signed a CBA, the retirement benefits under the CBA is taxable because by signing the CBA it will make
his separation voluntary.
C. Foreign retirement benefits gratuitously received by a resident or non-resident citizen of the Philippines or
alien who come to reside permanently in the Philippines are exempted from income tax.
D. Benefits given to persons residing in the Philippines whether alien or citizen by the USVA exempted from
income tax.
SSS and GSIS benefits are exempted from income tax.
7. Miscellaneous Items (READ: CIR vs. Mitsubishi, G.R. No. 54908, Jan. 22, 1990).
a) Income Derived from Foreign Government are exempt because of reciprocity between
countries, if there is a treaty or law that exempts it. Take note of the source of income.
b) Income Derived by the Government or its Political subdivisions not subject to tax because it
is an inherent limitation, provided that the government agency is performing governmental
function.
c) Prizes and Awards conditions to exempt from income tax:
I.

The award is primarily:

(1) religious;
(2) Charitable;
(3) Scientific;
(4) Educational;
(5) Artistic;
(6) Literary;
(7) Or civic achievement;
II.There was involuntary participation by the recipient
III. The award is unconditional meaning he is not required to render substantial future
service as a condition to receiving the prize or award.
All the three (3) conditions must be present to be exempted from income tax.
Mnemonics to remember: R E L A C C S

22

READ: R.A. 7549, May 22, 1992

E. 13th Month Pay and Other Benefits Gross benefits received by officials and employees of public and
private entities: Provided, however, that the total exclusion under this subparagraph shall not exceed
82,000.00. (R.A. 10653, February 12, 2015)
13th month pay are exempted if received by public or private entities. The first 82,000.00 would be
exempted, the excess would be subjected to income tax.
The term other benefits includes Christmas bonus, monthly bonus, quarterly bonus, etc.
Nota Bene take note of the tax provisions for minimum wage earners which exempt compensation
and other benefits.
F. GSIS, SSS, Medicare, Pag-IBIG contributions (which are employers share) are exempted from income
tax including union dues but not including contributions made by employers which are not enumerated in
par. F to be exempt.
G. Self-explanatory.
H. Self-explanatory.
Section 33 - Fringe Benefit this tax is imposed to the employee but payable by the employer under
the withholding tax system.
Rank and file employees are exempt from Fringe Benefit Tax (FBT)
Only supervisory or managerial employee are liable to pay FBT, except if:
1) The FB is required by the nature of the employment;
2) Necessary to the trade, business or profession of the employer;
3) FB is for the convenience and advantage of the employer.
The tax base is grossed up monetary value of the FB.
FB given to employees which are non-residents alien individual not engaged in trade or business
within the Philippines including the special alien individuals under Section 25 shall not be subject to FBT
but the regular rates imposed under Section 25.
Memorize definition of FB under Sec. 33.
FB means employees benefits supplementary to a money wage or salary.
Example of FB - see par. B, Section 33, no. 1-10
FB that are not taxable refer to par. C, Section 33. (memorize)
If the FB is already subjected to FBT it is no longer subject to tax as compensation income. So that if
the FB is exempted from FBT it would still be subject to compensation income tax unless if the employee
is also exempted from the income tax.
De minimis benefits (benefits of small value) is exempted both from FBT and compensation income
tax.
Examples of De minimis benefits:
1) monetized unused vacation leave not exceeding ten (10) days for private employees; for public
employees no limit.
2) Medical cash allowance to dependents not exceeding 700.00/semester or 125.00/month;
3) Rice subsidy 1,000.00/month or less;
4) Uniform allowance 3,000.00/annum;
5) Medical benefits 1,000.00/annum;
6) Laundry allowance 300.00/month.
READ: Revenue Regulation No. 1-2015
CHAPTER VII. Allowable Deductions.

23

A. Business Expenses in general: (Sec. 34 A)

I.
1.
2.
3.
4.
5.
6.
7.

Ordinary and Necessary Trade, business or Professional Expenses. Requisites:

Ordinary and necessary

Paid or incurred during the taxable year (fiscal or calendar year)
Connected and related to the taxpayers business
Substantiated by receipts or invoices (par b(1)A)
To be deducted in the category it belongs (e.g. taxes cannot be deducted as losses)
Reasonable expense
Not contrary to law, morals, public policy, public order, good customs.
Bribes, kickbacks and other similar payments NOT ALLOWED as expense.
Private Educational Institutions (Proprietary) is given the option to deduct the expenditures which are
capital outlay for expansion of school facilities either:
1. Deduct the entire amount of expenditures during the taxable year, or
2. Deduct as depreciation expense
II.

Itemized Deductions (the same requisites with the ordinary but with additional conditions):
1. Interest Expense (4 requisites)
- there must be an indebtedness
- proceeds of the loan is utilized in the business
- there must be a legal liability to pay interest
- indebtedness must be that of the taxpayer
- Tax Arbitrage Scheme the amount of interest of loans will be deducted from business
income net of the interest income received by the taxpayer from his bank deposits
subject to Final Tax
Example:
Interest Expense
Less : Bank deposit interest income
50,000 x 38% (effective Jan. 1, 2000)
Deductible interest expense
-

2.

60,000
19,000
41,000

Different treatment if the taxpayer used the CASH METHOD and the interest on loans
was prepaid interest expense. The entire prepaid interest expense will not be deducted
on the year the loan was incurred. The interest to be deducted must be prorated with the
payment of the principal loan.
Sec. 36(b). interest expense on loans obtained from related persons [Sec. 36(b)] NOT
DEDUCTIBLE.

Interest on indebtedness incurred to finance petroleum exploration NOT DEDUCTIBLE.

Optional treatment of Interest Expense when loans are incurred to acquire property to be
used in business:
1. Deduct the interest as outrightly; or
2. Treat the interest as capital expenditures. To be deducted through
depreciation.
Taxes
The following cannot be deducted:
1. Income Tax
2. Foreign Income Tax (if Foreign Tax credit is not utilized)
3. Estate and Donors Taxes
4. Transfer Tax on sale of shares of stocks (Sec. 127d)
5. Special Assessments

Taxes that are not enumerated above are deductible from business income provided it is connected.
Foreign Tax Credit is a portion of foreign income tax which can be used as a deduction from the
Philippine Income Tax due.

24

Two approaches:
1. Gross Income (within and without)
Less : Deductions (including Foreign Income Tax)
Taxable income
xxx
OR
2. Gross Income (within and without)
Less : Deductions (not including Foreign Income Tax)
Taxable income
xxx
Phil. Income Tax Due x x x
Less : Foreign Tax Credit (FTC)
Tax still due

xxx
xxx
xxx
xxx

xxx
xxx

FTC will only arise if the taxpayer is taxable in the Philippines of income derived within and without
the Philippines
C to determine FTC there is a Formula. The entire foreign tax paid cannot be used as FTC.
3.

Losses
Kinds of Losses
A. Ordinary losses

B.

Casualty losses

operation of the business

- NOLCO will apply
- connected with business
-

properties used in business

loss arises from fires, storms, shipwreck, or other casualties,
robbery, theft or embezzlement.
to be reported to the BIR not less than 30 days and not more
than 90 days.
not used as a losses deduction for estate tax purposes
proof of loss (par. 2 of par. D). study carefully.
should not be compensated by insurance to be deductible.

(to be discussed with Capital Gains)

C.

Capital losses

D.

Losses from Wash Sales - (to be discussed in Sec. 38)

E.

Wagering losses (gambling) to be deducted only from gambling gains [Sec. 39 (a)]

F.

Abandonment losses read

4.

Bad Debts (A/R that cannot be collected)

READ : Pareo vs. Sandigan. 256 SCRA 242
- Connected to business
- Actual bad debts or write-offs, not the estimated bad debts
- If recovered later after it was deducted, then the recovered bad debts to be
included as part of gross income in the taxable year it was recovered. This is the
Tax Benefit Rule.
- The tax benefit rule applies also to taxes previously used as a deduction and
later the taxpayer was able to get a refund.

5.

Depreciation
- property, plant and equipment are normally usable for a number of years. A point
will be reached when such property may not be useful anymore in the business
die to exhaustion, wear and tear.
- the owner will be able to recover the cost of the property because it will
gradually or periodically deducted from his gross income as deduction called
depreciation.
- depreciation will only apply to extraordinary expenditures or capital
expenditures.

Depreciation for income tax purposes, depreciation means the reduction in service value or
property used in business or trade arising from exhaustion, wear and tear, and obsolescence. (Sec. 195,
Rev. Reg. No. 2)
Depreciation commences with the acquisition of the property or with its erection.

25

Depreciation of properties used in petroleum operations is allowable.

Requisites for claiming depreciation deductible are as follows:
(a) It must be charged off
(b) Must be deducted directly from the book value of the assets
(c) Must be reasonable allowance
(d) Property must be used or employed in business or trade or must be determined if it is not being
used.
The proper allowance for depreciation of any property used in trade or business, or out of its not
being used, is that sum which should be set aside for the taxable year in accordance with a reasonable
consistent plan whereby the aggregate of the sums so set aside, plus salvage value, will, at the end of the
useful life of the property, suffice to provide an amount equal to the original cost. (Sec. 195, Rev. Regs.
No. 2)
Depreciation a deduction from gross income for depreciation is allowed but limits the recovery to
the capital invested in the asset being depreciated. The law does not authorize the depreciation of an
asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and
allowed. The reason is that deductions from gross income are privileges not matters of right. They are not
created by implication but upon clear expression of the law. (Basilan Estates, Inc. vs. Commissioner, G.R.
No. L-22492, Sept. 5, 1967)
Goodwill, trademarks, formulas.
(1) Business and income producing property other than land, generally depreciates or loses its
usefulness and value with the passage of time. A deduction for such depreciation is allowed in computing
taxable income. As such, your opinion that the assigned cost on the plant as determined at the time of
purchase can be depreciated for tax purposes is hereby confirmed.
(2) Goodwill, including trademarks, trade names, and trade brands, are not such property as are
subject to exhaustion. Accordingly, the value assigned on the trademarks which is computed on the basis
of future sales cannot be discounted to its present value at the time of acquisition and cannot be
amortized for tax purposes over the average remaining lives of the different trademarks purchased.
(3) Right to receive royalties over a given term is depreciable. Accordingly, your opinion that
discounted or present value at the time of acquisition and that it is acceptable for tax purposes to amortize
the said present values and royalties to be paid on the basis of future sales may be discounted, to
determine the present values and may be paid at said price (i.e., the cash price as discounted) over the
agreed period (say 5 to 8 years) when royalties will have to be paid is hereby confirmed. Moreover, said
royalty payment is subject to the 20% final withholding tax.
(4) Formulas are not subject to annual depreciation. If, however, after acquisition, a formula is
found to be worthless, its cost may be deducted in full as a loss for the year in which the formula is
abandoned as being worthless. Accordingly, the cost of the different formulas cannot be amortized over
the (a) remaining life of the trademarks purchased or (b) the expected period within which your client
proposes to continue manufacturing said products using the said formulas.
(5) Amounts paid for an agreement not to compete in a trade or business, where the taxpayer can
prove the existence of such an agreement, are capital expenditures and subject to allowances for
depreciation ratably spread over the period mentioned in the agreement but only where the elimination of
competition is for a definite and limited term may the cost be exhausted over such a term. Accordingly,
your opinion that the value agreed between your client and seller may not compete in the same line of
business that was sold to your client is hereby confirmed.
(6) Goodwill is not such property as is subject to exhaustion. Accordingly, your opinion that any
amount of goodwill paid for by your client may not be deducted for tax purposes unless the same
business or the assets related to the said goodwill is sold by your clo9ent is hereby confirmed. (BIR
Ruling No. 88-206)
Patents, copyrights, etc. Intangibles, the use of which in the trade or business is definitely limited in
duration, may be the subject of a depreciation allowance. Examples are patents, copyrights and
franchises. Intangibles, the use of which in the business or trade is not so limited, will not usually be a
proper subject of such an allowance. If, however, an intangible asset acquired through capital outlay is
known from experience to be of value in the business for only a limited period, the length of which can be
estimated from experience with reasonable certainty, such intangible asset may be the subject of a
depreciation allowance provided the facts are fully shown in the return or prior thereto the satisfaction of
the Commissioner of Internal Revenue. (Sec. 107, Income Tax Regulations)

26

Such being the case, the value assigned on the trademarks which is computed on the basis of future
sales can be discounted to its present value at the time of acquisition and can be amortized for tax
purposes over the average remaining lives of the different trademarks purchased. Moreover, the cost of
the different formulae can be amortized over the (a) remaining life of the trademarks purchased or (b) the
expected period within which your client proposes to continue manufacturing said products using the said
formulae.
-

Methods
Cost Salvage Value
Life (years)

1.

Straightline method -

2.
3.

Declining balance method

Sum of the years digit method. Read very well par. 4 (petroleum operations) and par. 6.

6.Depletion
- it is the cost or value of the exhaustion of natural resources, such as mines and
oil and gas wells, as a result of severance of production. Only persons having an
economic interest in a mineral land or oil gas wells are entitled to a depletion
allowance (which should not be more than the capital invested). To acquire an
economic interest, the taxpayer must have a capital investment in the property
and not a mere economic advantage.
7.Charitable and Other Contributions (par. H)
Two kinds
1) Deductible in Full (see par 2(a), (b), (c), and (d)
2) Deductible subject to limitation on the following:
1. Public purpose
2. Religious, charitable, scientific, youth, sports development, cultural or
educational purposes

Individual donor not in excess of 10% of taxable income without including the
charitable contribution as a deduction, whichever is lower with the original
contribution.
Corporate donor the same rule above except the rate is 5%
In both cases (full or with limitation) the contribution is given to a juridical person.
8.Research and Development self-explanatory (read)
9.Pension Trust
Requisites:
1. Employer contributes for the pension trust for the payment of reasonable pension for
employees. The contribution is a deductible business expense.
10.

Optional Standard Deduction (OSD)

- in lieu of the business deductions which required receipts
- non-resident alien cannot claim OSD
- NRFC not allowed OSD
- election of OSD is irrevocable for the taxable year for which the return was made
- deduction rate is 40% of Gross Income/Gross Sales/Gross Receipt
- there is no need to support the deduction with receipts
- a source of tax avoidance

If the taxpayer failed to elect the kind of deduction in his income tax return, he shall be considered as
having availed himself of the itemized deduction. Deduction elected for one taxable year is irrevocable for
that year. If the taxpayer elected both deductions in one taxable year, the optional standard deduction will
be disregarded. It must be emphasized that for one taxable year, a taxpayer must elect only one kind of
deduction.
11.

Premium Payments on Health and/or Hospitalization insurance

27

Query:

12.

only individuals (except NRA not doing business) can claim as deduction if
taxable under the schedular rates.
a deduction whether engaged in business or compensation earner.

(1) How much is the amount deductible?

(2) What is the ceiling of gross income to be allowed?
(3) Who can claim if the taxpayers are married?

Personal Exemptions
- For individuals only whose tax base is TAXABLE INCOME (Sec. 24-A)
- Regardless of STATUS BASIC P50,000.00
- Additional Exemptions for Dependent 25,000.00 for each but not more than four
(4) dependents.

Additional Exemptions for Dependents. There shall be allowed an additional exemption of

25,000.00 for each dependent not exceeding four (4) children.
The additional exemption for dependents shall be claimed by only one of the spouses in the case of
married individuals.
In the case of legally separated spouses, additional exemptions may be claimed only by the spouse
who has custody of the child or children. Provided, that the total amount of additional exemptions that
may be claimed by both shall not exceed the maximum of four (4) children allowed.
For purposes of this subsection, a dependent means a legitimate, illegitimate or legally adopted child
chiefly dependent upon and living with the taxpayer if such dependent is not more than 21 years of age,
unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support
because of mental or physical defect.
Dependent (to be qualified to the claim of 25,000)
- refers only to children who are legitimate, illegitimate or legally adopted
- chiefly dependent upon: more than 50% support
- living with: does not mean residing in the same house or roof or the same place
- not more than 21 years old and unmarried
- not gainfully employed
- regardless of age: incapable of self-support because of mental/physical defect
Change of Status If the taxpayer marries or should have additional dependent(s) as defined above
during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may
be, in full for such year.
Note: The change of status rule as single, HF or married is already irrelevant because the BASIS is now
50,000.00 regardless of STATUS.
If the taxpayer dies during the taxable year, his estate may still claim the personal and additional
exemptions for himself and his dependent(s) as if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such dependents marries, becomes 21 years
old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same
exemptions as if the spouse or any of the dependents died, or as if such dependents married, became 21
years old or became gainfully employed at the close of such year.
Example: Jan. 1, 2010 X is single; June 2, 2010 X got married; December 1, 2010 X became a widower
when the wife died after she delivered twin babies. On December 10, one of the twins died.
How much basic exemption for the 2010?
Personal Exemption Allowable to Nonresident Alien Individual a nonresident alien individual
engaged in trade, business or in the exercise of a profession in the Philippines shall be entitled to a
personal exemption in the amount equal to the exemptions allowed in the income tax law in the country of
which he is a subject or citizen, to citizens of the Philippines not residing in such country not to exceed the
amount fixed in this Section as exemption for citizens or residents of the Philippines. Provided, that said
nonresident alien should file a true and accurate return of the total income received by him from all
sources in the Philippines, as required by this Title.
Rules to observe
1. Reciprocity Rule
2. Whichever is lower rule
3. Can avail only basic personal exemption

28

Senior Citizen
- those 60 years old and above
- Exemption from the payment of individual income tax provided that their annual taxable
income does not exceed the poverty level of P60,000.00 or such amount as may be
determined by the NEDA for a certain taxable year.
Taxability of senior citizen to other internal revenue taxes.
a.

b.

c.

d.
e.

A senior citizen whose annual taxable income exceeds the poverty level of 60,000 or such
amount as may thereafter be determined by the NEDA for a certain taxable year shall be liable
to the individual income tax in the full amount thereof on his taxable income net of allowable
deductions.
Regardless of the amount of taxable income, a senior citizen who derives income from selfemployment, business and practice of profession shall be subject to other internal revenue taxes
which include but are not limited to the value-added tax, caterers tax, documentary stamp tax,
overseas communications tax, excise taxes, and other percentage taxes. He shall, therefore, file
the corresponding business tax returns in accordance with existing laws, rules and regulations.
He shall be subject to the 20% final withholding tax on interest income from Philippine Currency
bank deposit, yield and other monetary benefit from deposit substitutes, trust fund and similar
arrangements; royalties, prizes (except prizes amounting to 3,000 or less which shall be
subject to income tax at the rates prescribed under Section 21, par. (a) or (f), NIRC) as the case
may be, and winnings (except Philippine Charity Sweepstakes winnings).
Capital gains from sales of shares of stock (Sec. 21(d), [now Sec. 24], NIRC)
Capital gains from sales of real property (Sec. 21(e), [now Sec. 24], NIRC)

Basic personal exemption only for benefactor a qualified senior citizen living with and taken
cared of by a benefactor whether related to him or not, shall be treated as a dependent and his
benefactor shall be entitled to the basic personal exemption of 20,000 as head of the family, as defined
in Section 2(e) of these regulations. (This rule no longer applicable because of the 50,000.00
exemptions regardless of status.)
For purposes of claiming personal exemption as head of the family with dependent senior citizen, the
identification card number issued by the OSCA shall be indicated in the ITR to be filed by the benefactor.
The senior citizen shall indicate in a certification to be submitted to the RDO and the OSCA his benefactor
who will be granted the exclusive right to claim him as dependent for income tax purposes.
Caring for a dependent senior citizen shall not, however, entitle the benefactor to claim the additional
exemption allowable to a married individual or head of family with qualified dependent children under Sec.
29(1) (2) (now 34) of the NIRC, as amended.
Section 36. - Items not deductible
1. Absorb by personal exemptions
2. Capital expenditures absorb by depreciation
3. Extraordinary repairs. To be deducted through depreciation. The cost of repair added to the
value of the property to be depreciated.
4. Not allowed if the taxpayer is the beneficiary of the life insurance. If the beneficiary is not the
employer the premium is a deductible business expense.
Query:

A lawyer, exercising his profession, paid premium for his own life insurance. If he dies the
proceeds will go to his estate. Premium is deductible? How about if the beneficiary is his GF and
he is married?

5. Not allowed in order to avoid evasion and collusion. The prohibition is on losses. It includes also
interests on loans. See notes on interest expenses.
Why? (Sec. 36B)
1. Between members of the family. Take note of the degree of relationship being covered.
No. 2-6 -- considered one (1) personality in the eyes of the law.
Section 38 Losses from Wash Sales (WS)
- WS is a taxpayer scheme to recognize a deductible loss in his tax return by selling shares at
a loss when the shares sold are substantially identical stock or securities of that which were
purchased or acquired beginning 30 days before the date of sale and ending 30 days after
the sale.

29

- wash sales losses are not deductible from gains derived from wash sales transactions
- this rule applies only to securities (e.g., bonds) which are capital assets. Not on the stocks
because of the capital gains on sale of stocks rule on taxation.
- wash sales gains are to be reported and recognized as income
- this rule of nondeduction does not apply if the dealers transaction of stocks and securities is
made in the ordinary course of business.
- loss of WS is disallowed to prevent the taxpayer from manipulating a pretended or
engineered loss purely to establish a tax deduction
- WS gains are taxable under schedular rates (individual) and regular corporate tax
(corporation).
READ: Calasanz vs. CIR, 144 SCRA 664
Section 39 Taxation of Capital Gains and Losses on Capital Assets
- the rules do not apply to sale of capital assets (real property) of an individual and sale of
capital assets (land or buildings) of corporations, which are subject to Final Taxes. This rule
will not also apply to capital gains on sale of shares of stocks, because subject also to final
taxes (5% or 10% rates).
- if the capital gain/net capital gain arise the applicable tax rates would be schedular rates
(individual) and the regular corporate tax (corporation)
- memorize the following:
1. Ordinary Assets (four groups)
a. Stock in Trade and Inventories for sale in the regular conduct of business.
b. Properties primarily held for sale in trade or business.
c. Property used in trade or business subject to depreciation.
d. Real property used in business.
2. Net Capital Gain (NCG)
3. Net Capital Loss (NCL)
4. Net Capital Loss Carry Over (NCLCO)
- Rules
1. A capital loss is only deductible
from a capital gain
2. Percentage of gain or loss to
be recognized
- 100% Gain/Loss recognition if
held not more than 12 months
- 50% Gain/Loss recognition if
Held more than 12 months
Holding Period Rule
3. Net Capital Loss Carry Over

Individual
Applicable

Corporation
Applicable

-do-

Not Applicable

-do-

-do-

- Difference
NOLCO
- losses from business operation

- has a carry over of 3 years

following the year of such loss
Ex. Business operating losses in 2010
Can be carried over to 2011, 2012, and
2013.

NCLCO
arise from capital assets transaction
[Sec. 39(D)]
to be carried over only once,
following the year the NCLCO
was sustained.

Ex. Net capital loss in 2010 can be

deducted from the net capital gain in
2011. If after the deduction there is
still a balance of the 2010 net capital
loss, it can no longer be carried over
to 2012.
- subject to limitation. What can

Sec. 34 (D-3) NOLCO

- the entire Net operating loss

30

can be carried over

be carried over is not more than the

ordinary net income of that year the
net capital loss was sustained (2010)
or the actual net capital loss,
whichever is lower, that can be
carried over to the following taxable
year and will be a deduction from the
net capital gains of that year it was
carried over (2011)

- applies to corporate and

individual

applies only to individual

Section 39 (F) Gains and Losses from Short Sales

-

Short Sales (SS) is the taxpayers advanced sale of shares of stocks to another person even
before the seller actually owns the said shares. A SS can be at the same time a WS whenever
the selling and the subsequent buying (to meet the commitment to sell) happens within the 30
day period rule of WS.

Any loss from SS is deductible from the gain of SS except it is a WS. (Not applicable under the
present tax laws)

SS a typical capital asset transaction in the stock market.

Short Sale For income tax purposes, a short sale is not deemed to be consummated until
the delivery of property to cover the short sale. If the short sale is made through a broker and
the broker borrows property to make delivery, the short sale is not deemed to be
consummated until the obligation of the seller created by the short sale is finally discharged by
delivery of the property to the broker to replace the property borrowed by such broker.

Section 40.
(A)Query: How is the gain or loss computed?
What includes the amount of gain or loss to be realized?
(B)What are the basis?
(C) - No gain or loss to be recognized if its a merger or consolidation. Merger/Consolidation
are forms of business combinations for corporations (corporations as defined by the
Corporation Code)
Merger

two corporations combined and one of the name survived.

Consolidation -two corporations combined and a new name emerged.

Forms of exchange which are exceptions (par. c(2), Sec. 40)
a.Property vs. Stock
b.Stock vs. Stock
c. Securities (bonds or debentures) vs. Stocks/Securities
Reason : They became one entity after the combination.
(3) Exchanges not solely in kind
- Exchanges where it not only involves property (stocks/securities) but also cash and/or
properties (which are not stocks/securities), the gains will be recognized but not the
losses. The gain to be recognized is in an amount not in excess of the cash and the FMV
of such properties (e.g., tangible properties, lands or buildings)
Memorize the terms in par. 6 (Definitions)
Source Rules Section 42
The source rules to determine whether income shall be treated as income from within or outside
the Philippines can be found in Section 42 of the 1997 Tax Code. There are different source rules for
different types of income. The following incomes are considered as income from sources within the
Philippines:

31

1. Interests: Residence of the debtor or obligor. If the obligor or debtor (corporation or

otherwise) is a resident of the Philippines, the interest income is treated as income from
within the Philippines. It does not matter whether the loan agreement is signed in the
Philippines or abroad or the loan proceeds will be used in a project inside or outside the
country.
2. Dividends: Residence of the corporation paying dividend. Dividends received from a
domestic corporation or from a foreign corporation are treated as income from sources within
the Philippines, unless less than 50% of the gross income of the foreign corporation for the
three (3)-year period preceding the declaration of such dividends was derived from sources
within the Philippines, in which case, only the amount which bears the same ratio to such
dividends as the gross sources within the Philippines bears to its gross income from all
sources shall be treated as income from sources within the Philippines.
3. Services: Place of performance of the service. If the service is performed in the
Philippines, the income is treated as from sources within the Philippines.
Gross income from sources within the Philippines includes compensation for labor or personal
services performed within the Philippines, regardless of the residence of the payor, of the place in which
the contract for service was made, or of the place of payment. If a specific amount is paid for labor or
personal services performed in the Philippines, such amount shall be included in the gross income. If
there is no accurate allocation or segregation of compensation for labor or personal services performed in
the Philippines, the amount to be included in the gross income shall be determined on apportionment of
time basis; i.e., there shall be included in the gross income an amount which bears the same relation to
the total compensation as the number of days of performance of the labor or services within the
Philippines bears to the total number of days of performance of labor or services for which the payment is
made. Wages received for services rendered inside the territorial limits of the Philippines and wages of an
alien seaman earned on a coastwise vessel are to be regarded as from source within the Philippines
(Sec. 155, Rev. Regs. No. 2).
A non-resident alien is taxed only on her commission income for services rendered in the
Philippines. Baier-Nickel, a non-resident German, is the President of Jubanitex, Inc., a domestic
corporation engaged in manufacturing, marketing, acquiring, importing and exporting and selling
embroidered textile products. Through its General Manager, the corporation engaged the services of
Baier-Nickel as commission agent, who will receive 10% sales commission on all sales actually
concluded and collected through her efforts. In 1995, Baier-Nickel received commission income, which
Jubanitex withheld 10% and remitted to the BIR. Baier-Nickel filed her income tax return on October 17,
1997 and on April 14, 1998, she filed a claim for refund, contending that her commission income is not
taxable in the Philippines because it was compensation for her services rendered in Germany.
Non-resident aliens, whether or not engaged in trade or business, are subject to Philippine
income tax on their income received from all sources with the Philippines. The underlying theory is that
the consideration for taxation is protection of life and property and that the income rightly to be levied
upon to defray the burdens of the Government is that income which is created by activities and property
protected by the Government or obtained by persons enjoying that protection. The important factor,
therefore, which determines the source of income of personal services is not the residence of the payor,
or the place where the contract for service is entered into, of the place of payment, but the place where
the services were actually rendered (Baier-Nickel v. Commissioner, G.R. No. 156305, February 17, 2003).
In this case, however, the appointment letter of Baier-Nickel, as agent of Jubanitex, stipulated that
the activity or the service which would entitle her to 10% commission income, are sales actually
concluded and collected through her efforts. What she presented as evidence to prove that she
performed income-producing activities abroad were copies of documents she allegedly faxed to Jubanitex
and bearing instructions as to the sizes of, or designs and fabrics to be used in the finished products as
well as samples of sales orders purportedly relayed to her by clients. However, these documents do not
show whether the instructions or orders faxed ripened into concluded or collected sales in Germany. At
the very least, these pieces of evidence show that while Baier-Nickel was in Germany, she sent
instructions/orders to Jubanitex. Thus, claim for refund was denied (Commissioner v. Baier-Nickel, G.R.
No. 153793, August 29, 2006).
Income from turnkey contract with onshore and offshore portions. While the construction
and installation work were completed within the Philippines, the evidence is clear that some pieces of
equipment and suppliers were completely designed and engineered in Japan. The two (2) sets of ship
unloader and loader, the boats and the mobile equipment for the NDC project and the ammonia storage
tanks and refrigeration units were made and completed in Japan. They were already finished products
when shipped to the Philippines. The other construction supplies listed under the Offshore Portion such
as steel sheets, pipes and structures, electrical and instrument apparatus, were not finished products
when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the subcontractors in Japan. All services for the design, fabrication, engineering and manufacture of the materials
and equipment under Japanese Portion Yen I were made and completed in Japan. These services were

32

rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to tax on the part
of a foreign corporation (Commissioner v. Marubeni Corporation, G.R. No. 137377, December 18, 2011).
A tax sparing credit is a credit granted by the residence country for foreign taxes that for some
reasons were not actually paid to the source country but that would have been paid under the countrys
normal tax rules. The usual reason for the tax not being paid is that the source country has provided a tax
holiday or other tax incentive to foreign investors as an encouragement to invest or conduct business in
the country. In the absence of tax sparing, the actual beneficiary of a tax incentive provided by a source
country rather than the foreign investment may be the residence country rather than the foreign investor.
This result occur whenever the reduction in source-country tax is replaced by an increase in residencecountry tax.
In the leading case of Commissioner v. Procter & Gamble PMC (160 SCRA 560), the court ruled
that the preferential 15% tax on dividend paid to a non-resident foreign corporation is inapplicable
because of the failure of the claimant to show the actual amount credited by the U.S. government, to
present the U.S. income tax returns of PGMC-USA, and to submit a duly authenticated document
evidencing the tax credit of the 20% differential. Upon motion for reconsideration, the Supreme Court in
an en banc resolution reversed the earlier decision of the court. It pronounced that the 15% preferential
tax rate was applicable to the case at bar, because it was established that the Philippine Tax Code only
requires that the U.S. shall allow Procter & Gamble USA deemed paid the tax credit equivalent to 20%.
Clearly, the deemed paid which must be allowed by U.S. law to P&G USA is the same deemed paid
tax credit that Philippine law allows to a Philippine corporation with a wholly-or-majority-owned subsidiary
in the U.S. The deemed paid tax credit allowed in Section 902, U.S. Tax Code, is no more a credit for
phantom taxes than is the deemed paid tax credit granted in Section 30(C)(8) (now Sec. 28[B][5][b],
NIRC). The legal question should be distinguished from questions of administrative implementation
arising after the legal question has been answered. (Commissioner v. Procter & Gamble PMC, 204 SCRA
377)
The fact that Switzerland does not impose any tax on the dividends received from a domestic
corporation should be considered as full satisfaction of the condition that the 20% differential is deemed
credited by the Swiss government (as against the Commissioners contention that the tax-sparing credit
should apply only if the foreign country allows a foreign tax credit). The court observed that to deny
private respondent the privilege to withhold only 15% provided for under P.D. 369 would run counter to
the very spirit and intent of said law and definitely will adversely affect foreign corporations interest and
discourage them from investing capital in our country (Commissioner v. Wander Philippines, 160 SCRA
573).
What are disguised dividends in income taxation? Give an example.
Disguised dividends are those income payments made by a domestic corporation, which is a
subsidiary of a non-resident foreign corporation, to the latter ostensibly for services rendered by the latter
to the former, but which payments are disproportionately larger than the actual value of the services
rendered. In such case, the amount over and above the true value of the service rendered shall be
treated as a dividend, and shall be subjected to the corresponding tax of 35% on the Philippine sourced
gross income, or such other preferential rate as may be provided under a corresponding Tax Treaty.
Example: Royalty payments under a corresponding licensing agreement.
(A)Gross Income (GI) from sources within the Philippines.
- this provision enumerates certain kinds of income that would be considered derived within
the Philippines.
Example:
1. X is an American residing in Canada but he has bank deposits in the Philippines. His
interest income from the bank deposits will be considered derived within the Philippines.
this is an application of the territoriality rule as source of income.
2. Supposing X is also a stockholder of SMC. The dividend he will receive is also taxable in
the Philippines.
3. If the dividend is from a FC Corporation (doing business in the Philippines)
(1) General rule: considered derived within the Philippines;
(2) Pro-rata rule: if less that 50% of the FC gross income was derived in the Philippines
for the three (3) year period preceding the declaration of the dividend.
Example: In the 2010 FC declared dividend. The accumulated gross income FC derived
in the Philippines for the years 2007, 2008 and 2009 was P1 Million. FC total gross
income (2007, 2008 and 2009) within and without the Philippines was P3 Million. The
dividend declared would be prorated to get the portion taxable within the Phils. Thus:
1 million

33

Dividend declared x

3 million

b.

Services read par. 3

c.

Rentals and Royalties read par. 4

d.

Sale of Real Property read par. 5

e.

Sale of Personal Property (PP)

- PP is bought within the Phil., then sold outside the Phil. OR PP is bought outside of the
Phil. then sold within the Phil. = Gains or profits derived will be considered DERIVED within
the Phil.

f.

Gain from the sale of SS of a domestic corporation always treated derived within the Phil.
even if it is sold outside the Phil.
Rationale : Protection/benefit rule.

Taxable Income within the Philippines

General Rule: The deductions/business expenses must be connected/related to the income
derived within the Philippines.

Hence, Gross Income within the Philippines (trade, business or profession) shall only be deducted by
expenses incurred within the Philippines. Application of the connected/related rule on expenses.
Except : Interest paid on loans abroad, the proceeds of the loans is actually used in connection
with the conduct or operation of the business in the Philippines.
(B)GI from sources without the Philippines.
self-explanatory (par. C of Sec. 42)
Taxable income means GI without the Philippines less expenses without the Philippines.
(C)

Sources Partly within and Partly without the Philippines

Allocation rule will apply on gross income and expenses.
GI Partly within
Example: GI partly within and without x GI within and without
-

same computation for expenses

Section 43 50. - Accounting Periods and Methods of Accounting

-

Method and Accounting Period (Fiscal or Calendar) as basis of computing taxable income and the
method of accounting, it is the taxpayer who will choose. If no period or method is used or the
method used do not clearly reflect the income, the CIR will compute using the method in the
opinion of the CIR clearly reflects the income.
No uniform method of accounting can be prescribed for all taxpayers.

METHODS OF ACCOUNTING There are two main methods generally followed by taxpayers.
They are (a) the cash method, and (b) the accrual method.
Cash method is nearly used by individuals. All items of taxable income whether cash, property,
or services actually or constructively received are classed as receipts. Only amounts actually paid for
deductible expenses are classed as disbursements. Business expenses must be paid within the
taxable year. There is no such thing as constructive payment.
CASH METHOD in Accounting is different from CASH METHOD for Taxation.
Under the cash method for taxation purposes, there is constructive receipt of income to be
reported but no constructive payment of expenses to be reported.
Accrual method is used mostly by business concerns. Under this system, net income is
measured, in a broad sense, by the excess of income over expenditures. Cash, property, or services
earned during the taxable year, though not received have accrued to the taxpayer, and are classed as
income. In the same way, expenses incurred during the taxable year are usually deductible even if
they are not received during that year.
All events test means all events fixing an accrued method, taxpayers right to receive income, or incur
expenses must occur before the taxpayer can report an item of income or expense. (CIR vs. Isabela
Cultural Corp., G.R. No. 172231, February 12, 2007)

34

All events test (deductions) is met:

1. All events have occurred that fix the fact of liability
2. The liability can be determined with reasonable accuracy.
-

Computation of Business deductions based on accrual method

TAXABLE PERIOD the rule is that the taxable period of a taxpayer covers a period of 12 months.
The exceptions are as follows:
(a) In case of dissolution of a corporation.
(b) In case of change of accounting period.
(c) In case of corporation newly established.
(d) Final return of decedent.
(e) Return for the decedents estate.
(f)
In case the Commissioner of Internal Revenue terminates the tax period of a taxpayer.
Other accounting methods.
(a) Percentage of completion basis is a method available in the case of building, installation or
construction contracts covering a period in excess of one year, where there should be deducted from
gross income all expenditures made during the taxable year on account of the contract, account being
taken of the materials and supplies on hand at the beginning and end of the taxable period for use in
connection with the work done under the contract but not yet so applied.
(b) Completion of contract basis is a method available to contractors for building, installation or
construction covering a period more than one year where income is reported in case the contract is finally
completed and accepted.
(c) Crop year basis is a method where a farmer engaged in producing crops which take more than
a year from the time of planting to the process of gathering and dispositions, the law allows expenses
deducted to be determined upon such basis and such deductions must be taken in the year in which the
gross income from the crop has been realized.
(d) Installment plan or method is a method which is available to sales by dealers of personal
property on the installment basis, where the returnable income in the taxable year which the gross profit
realized or to be realized when payment is completed bears to the total contract price expressed in the
following formula:
Gross profit times installments received divided by total contract price equals returnable income.
The method applies also to sales of realty where the initial payment does not exceed 25% of the
selling price; if the initial payment of the selling price exceeds 25% thereof, then the income shall be
reported in full.
This applies further to casual sales of personality (other than property includible in the taxpayers
inventory) for a price exceeding 1,000 and where the initial payment does not exceed 25% of the selling
price.
Methods of determining taxable income.
(a) Percentage method
(b) Net-worth expenditure method
(c) Excess cash expenditure method
(d) Bank deposits
Requirements for use of net-worth method
(a) That the taxpayers books do not clearly reflect the income, or the taxpayer has no books, or if
he has books, he refuses to produce them.
(b) That there is evidence of a possible source or sources of income to account for the increases
in the networth or for expenditures.
(c) That there is a fixed starting point or opening networth, a date beginning with the taxable year
or prior to it at which the taxpayers financial condition can be affirmatively established, with
same definiteness; and

35

(d) That the circumstances are such that the method does clearly reflect the taxpayers income
with reasonable accuracy and certainty, and proper and just additions of personal expenses
and other non-deductible expenditures were made, and correct, fair and equitable credit
adjustments were given by way of eliminating non-taxable items.
-

Period for which deductions and credits taken = apply as paid or incurred rule

Section 51-59. Returns and Payment of Taxes

A.

Individuals
Required to file Income Tax Return
1.RC within and without income
2.NRC within income
3.RA within income
4.NRA within income
B.

NOT REQUIRED
1.If the gross income does not exceed his personal or additional exemptions. But this rule
does not apply if engaged in trade, business or exercise of profession.
2.Compensation earners purely derived in the Phil. and the income tax correctly withheld.
This rule does not apply if deriving compensation income from two (2) employers
within the taxable year.
3.Those whose sole income is subject to the final withholding taxes.
4.Minimum wage earner
Question:
1. How many copies of tax return will be filed?
2. Where to file the income tax returns?
3. When to file?
4. If both H and W are working, who will file?
5. If the child is a minor, but has income, who will file his return? How about
persons under disability?

Financial Statements Attached to the Income Tax Returns upon Filing

The financial statements required to be attached with the income tax returns:
1. Statement of Net Worth and Operations. This statement is to be attached with the income tax
return of individual taxpayers if the gross sales, receipts or output from business does not exceed
50,000 in any one quarter.
2. Balance Sheet and Profit and Loss Statements. These statements are to be attached with the
income tax return of individual taxpayers if the gross sales, earnings, receipt or output from
business in any one quarter exceed 150,000.
a. Balance Sheet and Profit and Loss Statement certified by an independent Certified Public
Accountant.
b. Comparative profit and Loss Statements for the current and preceding taxable years.
c. Schedule of income producing properties and corresponding income therefrom.
The said taxpayers books of accounts shall be audited and examined yearly by an independent
Certified Public Accountant and their income tax returns accompanied with a duly accomplished Account
Information lifter from certified balance sheets, profit and loss statements, schedules listing income
producing properties and the corresponding income therefrom and other relevant statements.
Annual Declaration and Quarterly Payments of Income tax for Individual Taxpayers.(Applies
only to those who are engage in trade, business or exercise of their profession).
1. On or before April 15 of the following year for the taxable income of the previous year.
2. April 15 of the same taxable year for the estimated income of the current year.
In general, except as otherwise provided by the law, every individual subject to income tax under
Sections 24 and 25 (A) of the National Internal Revenue Code who is receiving self-employment income,
whether it constitutes the sole source of his income or in combination with salaries, wages and other fixed
or determinable income, shall make and file a declaration of estimated income for the current taxable year
on or before April 15 of the same taxable year.
3. Return and Payments of Individuals Estimated Income tax.
FILING OF DECLARATIONS

36

AND PAYMENTS DATES

First

April 15 of the current taxable year

Second

August 15 of the current taxable year

Third

November 15 of the current taxable year

Fourth

April 15 of the following calendar year

When final adjusted income tax return
Is due for filing.
B. Corporation/Partnership
Read Sec. 52 56. Self-explanatory
CORPORATE RETURNS
Section 52 (A) of the National Internal Revenue Code provides that every corporation subject to the
tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall
render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return.
The return shall be filed by the president, vice president or other principal officers and shall be sworn
to by such officer and by the treasurer or assistant treasurer.
Taxable Year of Corporation
A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax
return.
A corporation shall not change the accounting period employed without prior approval from the
Commissioner in accordance with the prohibitions of Section 47 of the Tax Code.
Rules in filing and payment of corporate income tax:
1. The corporate quarterly return shall be filed within sixty (60) days following the close of each of
the first three quarters of the taxable year. (three times)
Example:
Calendar Year Jan., Feb., Mar. = File in the months of April and May
Fiscal Year June, July, Aug. = file in the months of Sept. and Oct.
2. The income tax due on the corporate quarterly returns and the final adjusted income tax returns
computed in accordance with Section 75 and 76 shall be paid at the time the declaration or return
is filed. (Pay as you file system)
3. The final adjustment return shall be filed on or before the 15 th day of April, or on before the 15th
day of the fourth month following the close of the fiscal year, as the case may be.
Note : Corporate Returns are filed four (4) times a year. Three quarterly and one final adjustment
return
CORPORATE QUARTERLY TAX
To ease the burden of paying taxes for a lump-sum amount, income tax expense of a corporation may
be paid in an aggregate quarterly periodic payment.
Rules:
1. A corporation files a quarterly income tax return within 60 days after the end of each first three
quarters of the taxable year.
2. A final income tax return covering the total taxable income of the taxable year should be filed on
or before April 15 of the following year. The amount of total income tax computed thereof shall be
reduced by income taxes paid during the first three quarters of the taxable year.
3. The amount of tax previously paid for the preceding quarters should reduce the amount of tax
computed on the cumulative taxable income.
4. If the total quarterly tax paid during the taxable year is more than the tax due on the final return
the corporation may claim tax credit carry over or refunded with the excess amount.
Section 57 to 59. Withholding Taxes
Withholding of taxes is a systematic way of collecting taxes at source. It is an indispensable method
for collecting taxes in order that the government can obtain adequate revenue. The withholding tax agent

37

who is usually an employer or a person from whom the income is derived does this process through
withholding the appropriate amount of taxes from taxpayers. It is designed to ensure the collection at
source of income taxes.
If withholding tax is not withheld from income payments, there will be a disallowance of deductible
business expenses claimed by the withholding agent in this income tax return or a penalty shall be
imposed on withholding tax agent for failure to withhold the tax.
Withholding Tax at Source
A taxation at source is that part of tax system which collects through withholding agents or employers
the appropriate income taxes due as they are earned and before earnings are paid to the employees.
The income paid to the employees is the net amount after deducting the taxes withheld which is
based on the taxable income after adjustments with respect to personal, additional exemptions and or
other adjustments allowed by the law, if any.
The primary objective of the system is to ensure accurate payment of taxes and to be able to use
taxes collected at an earlier time to finance the operations and projects of the government.
Classification of Withholding Tax at Source
Withholding tax may be classified into two categories such as
1) Final Withholding Tax, and
2) Creditable Withholding Tax
Final Withholding Tax (FWT)
Under the final withholding tax system the amount of income tax withheld by the withholding agent is
constituted as a full and final payment of the income tax due from the payee on the said income. The
liability for the payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of
failure to withhold or in case of under withholding, the deficiency tax shall be collected from the
payor/withholding agent. The payee is not required to file an income tax return for the particular income,
the final tax on which has been withheld.
The finality of the withholding tax is limited only to the payee or recipients income tax liability on the
particular income. It does not extend to the payees other tax liability on said income, such as when the
said income is further subject to a percentage tax.
Creditable Withholding Tax (CWT)
Under the creditable withholding tax system, taxes withheld on certain payments are intended to
equal or at least approximate the tax due of the payee on said income. The income recipient is still
required to file his income tax return as prescribed in the Section 51 of the NIRC, either to report the
income and/or pay the difference between the tax withheld and the tax due on the income. A tax withheld
in income payments covering the expanded withholding tax from compensation income is creditable in
nature.
Diferrence between FWT and CWT
- in FWT no more tax liability if properly withheld. In CWT it may or may not result to a balance of
tax liability.
Taxes withheld on compensation is an example of CWT.
Section 60 to 66. - Estates and Trusts
TAX ON INCOME OF ESTATE
The estate is composed of all properties, rights and obligations including those properties, earnings or
obligations that have accrued thereto since the opening of the succession. The estate is to be transferred
from the decedent to his successors.
During the period when the title to the properties is not yet finally transferred to the successors, there
may be earnings generated from the estate. These earning are subject to income tax.
Estates or Trusts Taxable Income and Tax

38

For taxation purposes, the taxable income of the estate/trust shall be determined in the same manner
and basis as in the case of individual taxpayers. The items composing the taxable income and tax of the
income from estates/trusts are as follows:
Treated as Individual Taxpayers
1. Gross Income
The items of gross income of the estate are the same items with the items of gross income of
individual taxpayers.
2. Deduction
Deductions from the gross income of the estates/trusts are the same with the items of
deduction allowed to individual taxpayer.
3. Special Deduction
In addition to the allowable deductions under Section 34 of the Tax Code, the estate is also
allowed to deduct the amount of income of the estate during the taxable year that is paid or
credited to the legatee, heir or beneficiary, subject to a creditable withholding tax of fifteen
percent (15%)
However, the amount so allowed as a deduction shall be a part of the taxable income of the
legatee, heir or beneficiary. It is to be noted that any portion of the gross estate paid to the heir
is not deductible from the gross income of the estate.
4. Exemption
Generally, the income from estate/trusts is allowed for an exemption of 20,000.
5. Tax Rate
The tax rate applicable is the tax rate prescribed for individual taxpayers.
TAX ON INCOME OF TRUSTS
A trust is an obligation imposed or a right to administer over a property given to a person for a benefit
of another.
This is a legal institution used to administer funds in behalf of individuals or organizations. Trust
device is used frequently to transfer property from one generation to another.
Illustration.
Suppose Juan wants his wife to have the income from his estate as long as she lives. Juan may
place his property in a trust, the income of which would go to his wife for life; the trust might be dissolved
at her death and the property distributed to the children. The trust is assigned to be administered by
Attorney Nilo, a trustee.
Under this arrangement, the trustee is required by law to manage the trust strictly in accordance with
the terms of the trust instrument.
When a trust is created, a new entity comes into being, for which returns must be filed and taxes paid.
Income accumulated in trust and/or to be distributed to beneficiary are subject to income tax.
A trust created by a written instrument other than a will is known as a trust inter-vivos, if created by
will is known as a testamentary trust.
Income Derived from Trusts.
Tax imposed upon individual taxpayers shall apply to the income of any property held in trust,
including:
1. Income accumulated in trust for the benefit of unborn or unascertained person/s with contingent
interests, and income accumulated or held for future distribution under the terms of the will or
trust;
2. Income that is to be distributed currently by the fiduciary to the beneficiaries, and income
collected by a guardian of an infant that is to be held or distributed as the court may direct; and
3. Income that, in the discretion of the fiduciary, may be either distributed to the beneficiaries or
accumulated.

39

The trust, or the beneficiaries or the grantor may pay the tax on income derived from trusts.
Computation of Trusts Income Tax
The computation of the net taxable income of trust shall be in the same manner with the net taxable
income of estate. The net taxable income shall be taxed by using the scheduler tax of an individual
taxpayer based on Sec. 24 A of the Tax Code.
Two or More Trusts
In the case of two or more trusts created by the same person, for the same beneficiary, the taxable
income of all trusts shall be consolidated and the tax shall be computed based on the consolidated
income.
The proportionate amount of the tax computed based on the consolidated income shall be assessed
and collected from each trustee which should be equal to the proportion of the taxable income of the trust
administered by the trustee to the consolidated income of the several trusts.
REVOCABLE TRUSTS
Generally, revocable trusts exist when the trustor (grantor) reserves the power to change at any time
any part of the terms of the trust. For tax purposes, the rule is that the grantor is liable for the income of a
revocable trust (because the revocable trust by itself is not subject to income tax except if the trust is
irrevocable (because irrevocable trust is subject to income tax, so that the grantor is already exempted
from income tax on the income derived from the irrevocable trust).
Illustration:
Mrs. Caduda Duda created a trust naming his eldest son as revocable beneficiary who will receive
the income of the trust. If the eldest son could not abide with the rules provided in the trust instrument,
Mrs. Duda could change outright the terms of the trust. For the year, the trust earned a total income of
200,000. How much would be the taxable income of the trust?
There is no taxable income of the trust because it is a revocable trust. The income should be reported
as taxable income of the grantor, Mrs. Caduda Duda.
Trusts, explained. These are taxable entities created by will or trust deeds where the transfer of
property to such trusts is irrevocable and the income of which is to be accumulated for designated
beneficiaries other than the grantor.
Estates and trusts are subject to the rates of income tax applicable to individuals. Income of estate or
trust includes the following:
(a) Income accumulated in trust for the benefit of unborn or unascertained person or persons with
contingent interests, and income accumulated or held for future distribution under the terms of
the will or trust.
(b) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income
collected by a guardian of an infant which is to be held or distributed as the court may direct.
(c) Income received by estates of deceased persons during the period of administration or
settlement of the estate; and
(d) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or
accumulated.
Trusts not subject to tax.
(a) Revocable trusts the income of which is held or distributed for the benefit of the grantor
(b) Employees pension trusts.
The taxable income of the estate or trust shall be computed in the same manner and on the same
basis as in the case of an individual. However, when it comes to allowable deductions, the guidelines in
Section 61 of the Tax Code, should be followed.
Exemption allowed to estates and trusts.
(a) 20,000.00 is allowed as an exemption.
Revocable trusts. Where at any time the power to revest in the grantor title to any part of the corpus
of the trust is vested (a) in the grantor, either alone or in conjunction with any person not having a

40

substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (b) in
any person not having a substantial adverse interest in the disposition of such part of the trust shall be
included in computing the net income of the grantor.
Income for the benefit of grantor. Where any part of the income of a trust
(a) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in
the disposition of such part of the income may be held or accumulated for future distribution to
the grantor;
(b) may, in the discretion of the grantor or of any person not having a substantial adverse interest in
the disposition of such part of the income, be distributed to the grantor;
(c) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in
the disposition of such part of the income may be, applied to the payment of premiums upon
policies of insurance on the life of the grantor; such part of the income of the trust shall be
included in computing the net income of the grantor.
Requisites for exemption of employees pension trust.
(a) The employees trust must be part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees;
(b) Contributions are made to the trust by such employer, such employees, or both;
(c) Such contributions are made for the purpose of distributing to such employees both the earning
and principal of the fund accumulated by the trust;
(d) The fund is accumulated by the trust in accordance with the plan of which the trust is a part;
(e) The trust instrument makes it impossible for any part of the trust corpus or income to be used
for, or diverted to, purposes other than for the exclusive benefit of such employees.
It may be noted that under Republic Act No. 4917, retirement benefits received by officials and
employees of private firms under a reasonable private benefit plan maintained by the employer are
exempt from all taxes.
Section 78 to 83. Withholding on Wages
INCOME TAX COLLECTED AT SOURCE ON COMPENSATION INCOME
Basic Rules on Withholding Taxes
As a general rule, all salaries earned by persons as government or non-government employees are
subject to withholding tax, except of the following items:
1. Commissions paid by an insurance agent to his sub-agents.
2. Compensation for services by a citizen or resident of the Philippines for a foreign government or
an international organization.
3. Remuneration for causal labor not in the course of employers trade or business.
4. Remuneration for private service performed by maids, cooks, gardeners, family drivers and the
like.
5. Remuneration paid to agricultural labor and paid entirely in products of the farm.
Requirement of Withholding Tax Due
Every employer must withhold taxes from compensation paid arising from employer employee
relationship. However, no withholding of tax shall be required where the total compensation income of an
individual does not exceed the statutory minimum wage of 5,000.00 monthly or 60,000.00 a year,
whichever is higher.
It is to be noted that employees whose total annual compensation does not exceed 60,000.00 in a
year shall be given two options with which to pay his income tax due as follows:
1. His compensation shall be subjected to withholding tax, but he shall not be required to file the
income tax return, or
2. His compensation income shall not be subject to a withholding tax but he shall file his annual
income tax return and pay the tax due thereon, annually.

41

Where the employee has opted to have his compensation income subjected to withholding so as to
be relieved of the obligation of filing an annual income tax return and paying his tax due on a lump sum
basis, he shall execute a waiver in a prescribed BIR form of his exemption form withholding which shall
constitute the authority for the employer to apply the withholding tax table provided under these
Regulations.
The employee who opts to file the Income Tax Return shall file the same not later than April 15 of the
year immediately following the taxable year.
Cumulative Average Method
This method is used if the compensation of a particular employee is exempt from withholding
because the amount thereof is below the compensation level, but supplementary compensation is paid
during the year; or the supplementary compensation is equal to or more than the regular compensation to
be paid; or the employee was newly hired and had a previous employer(s) within the calendar year, other
than the present employer doing this cumulative computation, the present employer shall determine the
tax to be deducted and withheld in accordance with the cumulative average method.
The cumulative average method, once applicable to a particular employee at any time during the
calendar year shall be the same method to be consistently used for the remaining payroll periods of the
same calendar year.
Annualized Withholding Tax Method
This method is used when an employer employee relationship is terminated before the end of the
calendar year and when computing for the year-end adjustment the employer shall determine the amount
to be withheld from the compensation on the last month of employment or in December of the current
calendar year in accordance with the following procedures.
PERSONS REQUIRED TO DEDUCT AND WITHHOLD
Section 2.57.3 enumerated the following persons who are hereby constituted as withholding agents
for purposes of the creditable taxes that are required to be withheld in income payments enumerated in
Section 2.57.2:
1. In general, any juridical person, whether or not engaged in business or trade;
2. An individual, with respect to payments made in connection with his trade or business. However,
insofar as taxable sale, exchange or transfer of real property is concerned, individual buyers who
are not engaged in trade or business are also constituted as withholding agents;
3. All government offices including government-owned or controlled corporations, as well as
provincial, city and municipal governments.
Time of Withholding
The obligation of the payor to deduct and withhold the tax under Section 25.7 of these regulations
arises at the time an income is paid or payable, whichever comes first. The term payable refers to the
date the obligation becomes due, demandable or legally enforceable.
Exemption from Withholding
The withholding of creditable withholding tax prescribed in these Regulations shall not apply to
income payments made to the following:
1. The National government and its instrumentalities, including provincial, city or municipal
governments;
2. Persons enjoying exemption from payment of income taxes pursuant to the provisions of any
law, general or special such as but not limited to the following:
a. Sales of real property by a corporation which is registered and certified by the Housing
and Land Use Regulatory Board (HLURB) or HUDCC as engaged in socialized
housing project where the selling price of the house and lot or only the lot does not
exceed 180,000.00 in Metro Manila and other highly urbanized areas and
150,000.00 in other areas or such adjusted amount of selling price for socialized
housing as may later be determined and adopted by the HLURB, as provided under
Republic Act No. 7279 and its implementing regulations.
b. Corporations registered with the Board of Investments and enjoying exemption from
the income tax provided by R.A. No. 7916 and the Omnibus Investment Code of 1987.

42

c.

Corporations which are exempt from the income tax under Section 10 of NIRC, to wit:
The GSIS, the SSS, the Phil. Health Insurance Corp., the PCSO and the PAGCOR;
However, the income payments arising from any activity is conducted for profit or
income derived from real or personal property shall be subjected to a withholding tax
as prescribed in these regulations.

Where to File
Creditable and final withholding taxes deducted and withheld by the withholding agent shall be paid
upon filing a return in duplicate with the authorized agent banks located within the Revenue District Office
(RDO) having jurisdiction over the residence or principal place of business of the withholding agent. In
places where there is no authorized agent banks, the return shall be filed directed with the Revenue
District Officer, Collection Officer or the duly authorized Treasurer of the city or municipality where the
withholding agents residence or principal place of business is located, or where the withholding agent is a
corporation, where the principal office is located except in cases where the Commissioner otherwise
permits.
When to file
The withholding tax return, whether creditable or final shall be filed and payments should be made
within 10 days after the end of each month except for taxes withheld for December, which shall be filed on
or before January 25 of the following year.
For large taxpayers, the filing of the return and the payment of tax shall be made within 25 days after
the end of each month.
The return for final withholding taxes on interest from any currency bank deposit and yield, or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements shall be
filed and the payment made within 25 days from the close of each calendar quarter.
Withholding Tax Statement
Every payer required to deduct and withhold taxes under there regulations shall furnish each payee,
whether individual or corporate, with a withholding tax statement, using the prescribed form (BIR Form
2307) showing the income payments made and the amount of taxes withheld there from, for every month
of the quarter within 20 days following the close of the taxable quarter employed by the payee in filing
his/its quarterly income tax return. Upon request of the payee, simultaneously with the income payment.
For final withholding taxes, the statement should be given to the payee on or before January 31 of the
succeeding year.
Annual Information Return for Income Tax Withheld
The payor is required to file to the Commissioner, Revenue Regional Director, Revenue District
Officer, Collection Agent in the city or municipality where the payor has his legal residence or principal
place of business, where the government office is located in the case of a government agency, on or
before January 31 of the following year in which payments were made, and Annual Information Return of
Income Tax Withheld at Source (Form No. 1604), showing among others the following information:
1. Name, address and taxpayers identification number (TIN);
2. Nature of income payments, gross amount and amount of tax withheld from each payee and
such other information as may be required by the Commissioner.
If the payor is the Government of the Philippines or any political subdivision or agency thereof, or any
government-owned or controlled corporation, the return shall be made by the officer or employee having
control of the payments or by any designated officer or employee.

DUE DATES
Due dates refer to the last day for filing return and payment of tax. The following are the due date
prescribed by laws for filing of return and payment of taxes.
Events

Due Date

1.

April 15 succeeding year

Income tax (taxpayer is individual)

43

2.

3.

4.

Income tax (taxpayer is individual, in

Business/practice of profession)
a. First quarter (Jan-March) .
b. Second quarter (April-June)
c. Third quarter (Jul-Sept)
d. Annual (final return)
Income tax (corporate taxpayers)
a. First quarter
b. Second quarter .
c. Third quarter ..
d. Final/adjustment return

April 15 same year (new)

August 15 same year
November 15 same year
April 15 succeeding year
60th day after end of quarter
60th day after end of quarter
60th day after end of quarter
15th day of the 4th month after
close of taxable year

Estate tax
a. Notice of death ..
b. Estate tax return

2 months after death

6 months after death

5.

Donors tax

30th day after each donation

6.

Value-added tax:
a. On sale of goods, services or property
(1) Monthly declaration .
(2) Quarterly return
b. On importation ..

25th day after months end

25th day after quarters end
Before release from Customs

7.

Other percentage taxes (quarterly return)

25th day after quarters end

8.

Capital gains tax on sale of shares of stock

(not traded through local stock exchange)
a. Per transaction return ..
b. Final/consolidated return ...

9.

10.

Capital gains tax on sale of real property

(capital asset) by individual
a. Cash sale ..
b. Installment sale
Remittance of tax withheld
a. In general
January to November .
December .
b. Large taxpayers

30th day after sale

15th day of 4th month after close
of taxable year

30th day after sale

30th day after receipt of installment
On or before 10th day of the
which withholding was made
Not later than January 25 of the
succeeding year
On or before 25th day of the month
following the month in which
withholding was made

Nota Bene A withholding agent (WA) is a taxpayer but not a statutory taxpayer. WA can claim a
tax refund if there is overpayment.
Take note of the following:
Meaning of :

1.
2.
3.
4.

Employee (Sec. 78(a))

Employer (Sec. 78(d))
Husband and Wife (Sec. 79 F)
Sec. 80b

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Updated August 2016

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